Consolidation

Large businesses usually operate through many separate legal companies. To show the whole group's financial position and performance, the parent company prepares consolidated financial statements.

In consolidation, the assets, liabilities, income and expenses of the parent and its subsidiaries are added together line by line. Transactions and balances between group companies, such as sales from one subsidiary to another or loans within the group, are removed, so the group does not report profits or debts with itself.

For example, if a parent company sells goods worth 2 million to its subsidiary, that sale is eliminated in consolidation, because the group as a whole has not sold anything to an outside customer.

Control is the key test. A parent consolidates a company when it has power over it, is exposed to its returns and can use its power to affect those returns. This usually means owning more than half the voting rights, though control can exist with less.

If the parent owns less than 100% of a subsidiary, the share belonging to other shareholders is shown separately as noncontrolling interest.