(b) To: Managing Director
From: Chief Accountant
Date: 5 May 20X9
Subject: Consolidated financial statements
The idea behind consolidated financial statements is to show a group of companies as a single
economic entity, which gives a more accurate representation of the performance of the whole group.
This is for several reasons:
The separate financial statements of the parent entity only show dividend income from the
subsidiary and therefore do not accurately represent the profits made by the group which
include all of the profits made by the subsidiary less amounts due to non-controlling
shareholders
Trading between group companies is reflected in the sales and purchases in each group
company's statement of profit or loss, but from the point of view of the whole group is artificial
because it is within the group. This is eliminated on consolidation, therefore showing a true
picture of trading with third parties.
The separate financial statements of the parent normally show the investment made in the
subsidiary at its cost rather than the true picture of the accounting valuation of assets and
liabilities at the year end under the group's control.
The group financial statements also show the amount of money paid attributable to purchased
goodwill and whether this has subsequently fallen in value.
Without the consolidated financial statements, it is impossible for the shareholders of the parent entity to see the full picture of their investment in the whole group and make accurate investment decisions.
Additionally, it is a requirement of IFRS 10 Consolidated Financial Statements that consolidated
financial statements are prepared where appropriate for companies who wish to state that their
financial statements are prepared in accordance with International Financial Reporting Standards. |
