Strategy, Legal & Operations

What are consolidated financial statements?

How often do people talk about Facebook when they mean Meta? That distinction is even more important for investors and regulators. The consolidated financial statement makes it clear which part of the hierarchy you’re talking about.

When your business owns more than one company, it can be hard to keep track of each subsidiary’s contribution to the overall result. You may have multiple income statements, balance sheets and reports floating around. How can you make sense of it all? 

You do so by gathering all the information in a consolidated financial statement. This gives a clear overview of how the group as a whole is performing, and the role of each unit. 

Consolidated financials are often required by accounting rules, but they’re useful in their own right because they help you make smarter decisions.  

Let’s look at what exactly consolidated financial statements are, why they matter, and how to use them properly.  

Here’s what we cover:

What are consolidated financial statements?

Consolidated financial statements pull together the finances of a parent company and all its subsidiaries  into a single set of reports. They provide a high-level view of the group’s overall financial position, performance and cash flows, rather than focusing on each sub-unit in isolation. 

The consolidated statement is like a grand total, but adjusted to remove internal transactions between companies in the group—like sales from one subsidiary to another. This means the entire result is based only on the group’s activities with external parties.  

For example, if Subsidiary A owes £50,000 to Subsidiary B, this balance would appear on both their individual balance sheets. But it’s not a real obligation from the group’s perspective so in the consolidated report it can be removed. 

The technical term for accidental inclusion of internal movements is double-counting, and the consolidated statement is set up to ensure that doesn’t happen. 

These statements follow specific international accounting standards, such as IFRS (International Financial Reporting Standards) and GAAP (Generally Accepted Accounting Principles), depending on jurisdiction. If your business owns or controls other companies, you’re required to publish a consolidated financial statement—unless specific exemptions apply. This makes it easier for regulators, tax authorities and auditors to review your accounts using rules they already know.  

Why are consolidated financial statements important?

First of all, consolidated financial statements give your managers, investors, regulators and tax authorities an accurate rundown of how the group is performing. Primarily, it’s up-to-date information that you and your leadership team can use to steer the business. 

Having this bird’s-eye view helps you make smarter decisions about your game plan for the whole group—and for each individual business. You can work out which subsidiaries are profitable, which are underperforming, and exactly where your cash is being generated or tied up. 

These reports also support compliance. That’s because they follow IFRS and GAAP standards, which set the rules for how consolidated statements must be prepared—again, unless specific exemptions apply. If you don’t follow these standards, you could run into legal or regulatory issues later on. 

What is included in a consolidated financial statement? 

The consolidated financial statement is really several reports in one. Each secondary report lets you zoom in on the different layers of the business to see whether key metrics have shifted over time. 

The different components help you read between the lines and spot trends across the group. Here’s what’s involved and why each part matters. 

Consolidated statement of financial position

The consolidated statement of financial position is the crux of the consolidated financial statement. It serves as a snapshot of the group’s financial position at a specific reporting date, and underpins analysis of solvency and capital structure. It’s a top-level view that shows what the group owns and owes at that time. It covers the group’s assets, liabilities and equity. All intra-group balances and investments in subsidiaries are eliminated during consolidation, in line with the IFRS 10 and IAS 27 standards. 

This statement highlights how the group is funding its operations, whether through debt or equity, and how stable that structure is. It’s useful for understanding how well your group is managing its resources, and whether you’re in a strong position to invest, borrow or distribute profits. Investors and lenders often use this statement to assess risk and financial health before making decisions. 

Consolidated statement of profit and loss

If the statement of financial position shows the group’s financial health, the consolidated profit and loss statement shows the reason for that health—or lack of it. It tracks how the group has performed over a set period, combining income and expenses from the parent and all subsidiaries. 

You’ll see total revenue, cost of sales, operating profit, tax, and net profit—all consolidated into one report. Again, intercompany sales are excluded, because they don’t count as real income for the group. 

However, where subsidiaries are not wholly owned, the share of profits or losses attributable to non-controlling interests (NCI) is disclosed separately, as required under IFRS 10. So, if there’s anything affecting performance in any unit—better profit or rising costs, say—you can identify where. This lets you take corrective action, or apply what’s working in one division to all the others. 

Consolidated statement of cash flows

You may have high profits—but if customers aren’t paying on time, that signals poor cash flow. Despite you profitability, poor cash flow can be a serious problem because it affects your ability to pay staff, suppliers, or invest in growth. If this goes unchecked it can push an otherwise healthy business into crisis. 

The consolidated statement of cash flows addresses this by showing exactly how money moves in and out of the group. It tracks operating cash (from core business activities), investments (cash from buying or selling assets), and financing (cash from loans or dividends). 

If there’s an obstacle in one of those areas, this is apparent in the statement. You can then make adjustments to manage liquidity and plan for long-term financial health. 

Consolidated statement of changes in equity

This statement tells your shareholders how much they’re being paid, and whether their stake in the business has changed. For example, if a new shareholder is added to one subsidiary, that could affect how profits are distributed elsewhere in the group—or how much is kept back for reinvestment. 

Primarily, this statement shows how value is being built or distributed across the group. It reflects the returns to shareholders, as well as whether profits are being retained or paid out. It also highlights structural changes—such as new share capital or revaluations—which, while secondary, help explain why ownership stakes or reserves have shifted. 

The following components tell you whether the group is reinvesting in growth or paying out earnings: 

• Retained earnings: profit kept in the business after paying dividends. 
• Dividends paid: distributions of profit to shareholders during the reporting period. 
• Share capital movements: changes from issuing or buying back shares. 
• Currency translation adjustments: gains or losses from converting foreign subsidiaries’ results. 
• Revaluation or other reserves: adjustments to asset values or reserves set aside for specific purposes. 

How do consolidated statements differ from individual financial statements?

So if the consolidated statement is built from the individual financial statements, why do we need the latter? Well, there are situations where individual statements are not only useful but essential. The differences are best illustrated in a side-by-side comparison: 

	Consolidated statement	Individual statement
Intercompany transactions	Removed (eliminated)	Shown in full
Audience	Investors, regulators, internal stakeholders	Internal use, subsidiary-level compliance
Decision-making	Group-level planning and investment	Subsidiary-level performance and operations
Legal requirement	Often required by IFRS/GAAP for group reporting	Required for legal filing in each jurisdiction

In short, managers within the subsidiaries do need these individual reports to monitor local performance, meet statutory requirements, and decide on operational issues that don’t show up in the group view. 

Who needs to issue consolidated financial statements?

UK company law (notably the Companies Act 2006) and applicable accounting standards—either IFRS 10 or UK GAAP (FRS 102)—dictate whether your group is required to prepare consolidated financial statements or not. It depends on your reporting framework.  

These statements may also need to be submitted to Companies House, reviewed by external auditors, and used in group tax filings to HMRC. This is usually the case if size thresholds are exceeded or the group includes subsidiaries. 

However, as a rule of thumb, the multi-unit businesses that need to prepare consolidated accounts fall into these categories:  

Holding companies

A holding company is typically created to control shares in other businesses rather than carry out its own trading activity. Because it oversees a group of companies, it must present a single view of the group’s finances. 

Parent companies with subsidiaries

Unlike pure holding companies, there are cases when a parent company does run business operations independently of the subsidiaries it owns. If you control another business—usually through majority shareholding—you’re required to consolidate its accounts into yours. 

Groups engaged in joint ventures

Under IFRS, joint ventures are not usually fully consolidated. Instead, the equity method (IFRS 11, IAS 28) is applied, reflecting the investor’s share of net assets and profit. Joint operations (a distinct structure) may result in proportionate consolidation. The deciding factor is the type of joint arrangement and whether the entity has joint control or merely significant influence (which applies to associates). 

Common challenges and mistakes to avoid

Even with experienced finance teams, when consolidating financial statements there are opportunities for errors, delays, or compliance issues. Here are some of the most common challenges—and how to avoid them. 

Intercompany transactions

One of the most frequent mistakes is failing to properly eliminate intercompany transactions—things like internal sales, loans, or management fees between subsidiaries. If these aren’t removed during consolidation, they artificially inflate your income, expenses, assets or liabilities. That would directly violate IFRS 10 and FRS 102 rules on overstating financial indices. 

These errors can happen because different entities may record the same transaction in slightly different ways or on different dates. Reconciliations may also be missed due to time pressure or miscommunication. Without a reliable system to match and eliminate these entries automatically, small discrepancies can quickly multiply. 

Foreign currency conversion

When subsidiaries use different currencies, you need to convert their results into a single reporting currency. Mistakes often occur when exchange rates are applied inconsistently, or when translation differences aren’t recorded correctly in equity. 

These differences need to be recognised in what’s known as a foreign currency translation reserve (FCTR) —a special equity account that tracks currency gains or losses from converting transactions between foreign entities. If this step is skipped or handled incorrectly, the group’s equity position becomes unreliable. 

The impact of these errors is magnified in volatile currency markets. Using accounting software with built-in currency handling can help you apply consistent, real-time rates across the group. 

Inconsistent accounting policies

If companies within the group use different accounting methods for revenue, depreciation or inventory, you’ll run into problems at the consolidation stage. These inconsistencies may even breach reporting standards—Under IFRS 10 and FRS 102, the parent company must ensure all group entities use uniform accounting policies for like transactions and events in similar circumstances. 

The best approach is to align accounting policies across all entities early on. This is easier with cloud-based accounting systems that apply shared rules across the group. 

Manual consolidation processes

Trying to consolidate accounts manually using spreadsheets or siloed systems introduces risks at every stage. When multiple people work on different copies of the same file, you could end up with conflicting data, outdated figures or overwritten formulas. It becomes hard to know which version is the most accurate or up to date. 

But even a person working alone can make formula errors or enter the wrong data. It’s all difficult to spot without built-in checks, and a small mistake in one cell can affect the entire report. 

Modern financial consolidation software helps reduce errors, resulting in faster reporting and more reliable compliance. It also facilitates audits by providing a clear record of how figures were calculated and adjusted. 

Consolidated financial statement FAQs

Here’s the answer to some common questions about consolidated financial statements.

1. Are consolidated statements audited?

Yes, they often are—especially if your group exceeds size and performance limits defined by UK law. For example, a group must typically be audited if it meets at least two of the following: turnover over £10.2 million, assets over £5.1 million, or more than 50 employees. 

These limits are known as the audit threshold. In case of exceeding the threshold an external auditor checks that the consolidated financial statements are accurate, complete and in line with applicable accounting standards.  

2. Can private companies be exempt?

Yes, in some cases—but it depends on UK legislation and your company’s structure. Small groups may qualify for exemption from preparing consolidated financial statements if they meet the conditions set out in the Companies Act 2006 (Sections 400–402). 

Generally, if the group is below certain size thresholds—based on turnover, assets and number of employees—it may be exempt. However, the exemption doesn’t apply if the parent company is listed, or if certain members of the group require consolidation for legal or contractual reasons. 

A company cannot simply choose to stop consolidating. It must meet legal exemption criteria—such as no longer having subsidiaries, or undergoing a structural change like a spinoff. There’s no formal “change request” process for private companies in the UK, but the change must be disclosed and justified in the financial statements. Auditors must also agree that the exemption applies. 

For public companies, switching from consolidated to unconsolidated reporting may raise concerns with investors and require more scrutiny from auditors. Any change must be fully disclosed and explained in the notes to the accounts, and auditors must confirm that exemption criteria have been met.  

In practice, filing consolidated financial statements is a long-term accounting decision—not something to reverse without a strong, well-documented reason. 

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