Consolidated versus consolidating financials
(Some countries do not allow overseas companies to start businesses without a partnership with a domestic company in the home country).
Such acquired stakes should be recorded in the financial statements.
E.g.: If the parent company holds 65% of the subsidiary, the minority interest is 35%.
Supposing the subsidiary made a net income of $ 56,000 for the year, the minority interest will be $ 19,600 (56,000* 35%) The main difference between combined and consolidated financial statements depends on the way that financial results are presented.
However, this does not indicate the percentage of ownership of the holding company by the parent.
In this approach, the financial results of the parent and the holding companies are presented as a single entity.
Many large scale organizations use consolidated financial statements at the year-end due to its increased accuracy and as it is required by law if the stake of ownership exceeds 50%.
However, the preparation of consolidated statements is complicated and time-consuming in comparison with combined financial statements.
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), requires companies to prepare consolidated financial statements when they hold a controlling interest; more than 50 percent ownership in other businesses.
If the results are recorded separately for the parent and the holding company, this is referred to as Combined Financial Statements. Summary The parent company can acquire a stake in the holding company as below.
If the results of the holding companies are amalgamated and recorded depending on their share of ownership by the parent company, then such statements are called Consolidated Financial Statements. The parent company owns a stake of more than 50% of the subsidiary; thus it exerts control.
Also referred to as the ‘minority interest’, this is the share of ownership in a subsidiary’s equity that is not owned or controlled by the parent company.
This will be calculated using the net income of the subsidiary that belongs to the minority shareholders.