Financial statements are like a report card of a company. They reflect the financial condition i.e., position of assets and liabilities of a company as on a specific date. With globalization at its peak, there are several multinational companies which are formed by a network of companies incorporated across different countries. These networks of companies generally form a vertical hierarchical chain with one company being a holding company and other companies being its subsidiaries or step down subsidiaries.
This article looks at meaning of and differences between two different types of financial statements that are relevant from the standpoint of a group of companies – standalone and consolidated financial statements.
Definitions and explanations
Standalone financial statements:
Standalone financial statements are the financial statements of a single company. These statements reflect the position of assets and liabilities of the holding company in isolation without considering the impact of the assets and liabilities of its subsidiary companies.
Standalone financial statements reflect the financial performance of the holding company irrespective of the financial performance of its subsidiaries.
The reporting of details of subsidiaries are not completely absent in the standalone financial statements. The interest of the holding company in its subsidiaries is reflected as investments in its standalone financial statements. The receivables and payables from subsidiaries are also reflected as assets and liabilities in the standalone balance sheet.
Consolidated financial statements:
Consolidated financial statements are drawn up when the individual financial statements of all subsidiary companies are combined with the standalone financial statements of the holding company.
Consolidated financial statements reflect the financial performance and position of assets and liabilities of the entire group as a whole.
Preparation of consolidated financial statements require adherence to consolidation rules. Consolidation rules provide for elimination of all inter-company transactions. For e.g.: a receivable from the subsidiary in the books of the holding company will be reflected as a payable in the books of the subsidiary and both will be eliminated on consolidation.
In order for a company’s financial statement to qualify as a subsidiary for consolidation, the holding company must hold more than 50% shareholding. Any lower shareholding in any company will not qualify for consolidation and will continue to reflect as an investment even in the consolidated financial statements of the holding company.
In cases where a holding company holds less than 100% of its subsidiary, it will still incorporate 100% of the subsidiary’s balances and will compute an amount of minority interest which represents its liability towards the minority shareholders of its subsidiary.
Difference between standalone and consolidated financial statements:
The difference between standalone and consolidated financial statements has been detailed below:
- Standalone financial statements are the financial statements of one company – in the case of a group, that of the holding company without considering the financial statements of its subsidiary companies.
- Consolidated financial statements are the combined financial statements of the holding company with all its subsidiary companies.
2. Financial position reflected
- Standalone financial statements do not reflect the financial condition of the entire group but only of the single company whose financial statements are prepared.
- Consolidated financial statements of a company by incorporating financial statements of its subsidiaries reflect a more comprehensive financial condition of the entire group of companies.
3. Reporting of subsidiary balances
- In standalone financial statements, all subsidiary transactions and balances are reported such as inter-company sales and purchases and inter-company receivable and payables, investment in subsidiaries etc.
- In consolidated financial statements, subsidiary transactions and balances are not separately reported as they are knocked off against each other on consolidation of inter-company transactions.
4. Reported by
- Standalone financial statements are prepared by all companies.
- Consolidated financial statements are only prepared by holding companies that have one or more subsidiaries.
5. Balances pertaining to individual companies
- In standalone financial statements, the incomes and expenses and asset and liability balances of each individual can be identified.
- In consolidated financial statements, the transactions and balances of individual companies cannot be identified as they are all combined and reported as a whole for the group.
6. Reporting of equity
- Standalone financial statements only report its shareholders’ interest in its balance sheet.
- Consolidated financial statements report both its shareholders’ interests and the minority interest of its subsidiaries, where applicable.
- Standalone financial statements are less complex to prepare.
- Consolidated financial statements involve adherence to prescribed consolidation rules and passing of several complex elimination entries to eliminate inter-company transactions which makes its preparation more complex.
8. Relevance to investors of a group
- Standalone financial statements do not reflect the financial condition of the entire group. In reality, for investors of companies especially those dependent on group transactions and group support, the financial position of its group companies are also relevant and hence standalone financial statements are less relevant in such cases.
- Consolidated financial statements are more relevant to investors to gauge the financial condition of the group as a whole.
9. Relevance for tax compliances
- Standalone financial statements are more relevant from the perspective of tax compliances. Each company is a separate taxable entity and thus its standalone financial statements are considered while undertaking tax compliances.
- Consolidated financial statements are less relevant from a tax compliance perspective.
It should be noted that while this is true in most tax jurisdictions, several countries such as USA, Australia and France allow tax consolidation for which consolidated financial statements become relevant.
10. Order of preparation
- Standalone financial statements of all group companies are prepared first and form the basis of preparation of consolidated financial statements.
- Consolidated financial statements are prepared subsequent to preparation of standalone financial statements.
Standalone versus consolidated financial statements – tabular comparison
A tabular comparison of standalone and consolidated financial statements is given below:
|Financial statements of an individual company||Financial statements of multiple companies combined together – holding company and its subsidiaries|
|Financial position reflected|
|Of the single company||Of the entire group of companies as a whole|
|Reporting of subsidiary balances|
|Reported||Not reported, as they are knocked off in elimination of inter-company transactions|
|All companies||Only by holding companies, with one or more subsidiaries|
|Balances pertaining to individual companies|
|Can be identified||Cannot be identified|
|Reporting of equity|
|Only its shareholders’ interests||Shareholders’ interests + Minority interest|
|Less complex||More complex|
|Relevance to investors of a group|
|Less relevant to know financial condition of the group||More relevant|
|Relevance for tax compliances|
|More relevant||Less relevant (other than in countries which permit tax consolidation)|
|Order of preparation|
|Prepared first||Prepared subsequent to standalone financial statements|
Conclusion – stand alone vs consolidated financial statements:
While preparation of standalone financial statements is a simpler process of reporting of assets and liabilities of a company from its base books of accounts, preparation of consolidated financial statements is more complex. Preparation of consolidated financial statements requires advanced accounting knowledge and knowledge of complex consolidation rules. These are especially relevant to group companies who have several subsidiaries sometimes across different jurisdictions.