Question

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Answer 1

Consolidated Financial Statements

Consolidated financial statements exhibit the financial position and effects of operations for a parent and one or more subsidiaries i.e controlled entities as if the individual entities were a single company or entity

Benefits of Consolidated financial statements

1. Consolidated financial statements are presented principally for the interest of the shareholders, creditors, legal authorities and other users of the financial statements of the parent.

2. Consolidated financial statements represent the only means to obtain a clear picture of the total resources of the Parent and all the combined entities that are under the control of the parent entity

Limitations:

1. Adjustments made on consolidation do not affect distributable profit and Dividend of the respective individual companies

2. Only individual company assets are available to settle the debts except such debts are cross‐guaranteed

3. Loss of information any time data sets are aggregated; this is especially true when the adjustments involve an aggregation across companies that have extensively different operating characteristics.

Direct control v/s Indirect Control:

The professional guidance regarding consolidated financial statements is provided under ARB 51 and FASB 94. which specifies that consolidated financial statements must be prepared if one entity owns a majority of another entity's outstanding common stock. Indirect control occurs when an entity's stock is owned by one or more other companies that are all under common control.

Objectives of FASB Standard 160:

The objective of this Standard is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards.

Difference between Combined Financial Statements & Consolidated Financial Statements

Combined Financial Statements

A combined financial statement shows the financial position of different subsidiary entities from that of the Holding entity. The complete financial statement of one subsidiary is shown independently from another as a stand-alone entity. The advantage of combined financial statements is that it permits an investor to scrutinize the results and measure the performance of the specific subsidiary entity separately.

Consolidated Financial Statements

Consolidated financial statements aggregate the financial position of a Holding company and its subsidiaries. This permits an investor to examine the overall financial position of the company holistically rather than viewing the individual entity's financial statements separately. In other words, the consolidated financial statements Combine the results of the subsidiary businesses into the parent company's income statement, balance sheet, and cash flow statement as a whole

Differences in the Reporting of Stockholder's Equity

Consolidated financial statements simply cancel the stockholder's equity share of the subsidiary. Therefore, there are no adjustments to shareholder ownership accounts, such as stock and retained earnings. In opposition, combined financial statements add the stockholder's equity to that of the holding. This is because the holding has a controlling interest in the subsidiary companies.