Consolidated Financial Statement:

Consolidated financial statements are financial statements that factor the holding company's
subsidiaries into its aggregated accounting figure. It is a representation of how the holding
company is doing as a group. The consolidated accounts should provide a true and fair view of
the financial and operating conditions of the group. Doing so typically requires a complex set of
eliminating and consolidating entries to work back from individual financial statements to a
group financial statement that is an accurate representation of operations.

Purpose of Consolidated Financial Statements:

The purpose of preparing consolidated financial statements is to report financial condition

and operating result of a consolidated business group, which is assumed as one entity comprised
of more than one companies (including entities other than "companies") under a common
control.

General Principles

I. Consolidated financial statements should provide true and fair view of financial condition
and operating result of the business group.

II. Consolidated financial statements should be prepared based on legal-entity based

financial statements of the parent and subsidiaries that belong to the business group,
which are prepared in accordance with the generally accepted accounting principles.

III. Consolidated financial statements should display clearly financial information necessary
for interest parties not to mislead their judgments about the condition of the business
group.

IV. Policies and procedures used for preparing consolidated financial statements should be
applied continuously and not be changed without reason.

General Standards

I. Scope of Consolidation

1. In principle, the parent should consolidate all subsidiaries.

2. A parent is a company that controls effectively other companies, and the other
companies are subsidiaries.

If a company is a reorganized, liquidated, bankrupt or other similar company and there is

no unity of organization because of no effective control, the company is not a subsidiary.
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 An effective control is a control over the decision-making body of a company. A
company that shows one of the following indications is assumed as a subsidiary, unless any
counter evidence supports that no effective control exists over the decision making body:

a. A company holds effectively the majority of the voting interests in the other company.
If voting shares or interest is owned in a company's account, whomever the ownership is titled
to, such as executives of the company, the shares or interest is supposed to be owned in
substance by the company.

b. A company holds less than 50 percent but significant minority of the voting interests in
the other company, and there is certain facts that support the existence of control over the
decision making body of the other company.

3. If a parent and its subsidiaries or the subsidiaries control effectively other companies,
the other companies are assumed as subsidiaries as well.

4. A subsidiary that meets one of the following conditions should not be consolidated:

a. The control over the subsidiary is temporal.

b. Even if the subsidiary does not meet the condition (a), consolidation of the subsidiary
would mislead significantly the judgments of the interest parties.

If a subsidiary is immaterial in assets, sales, and other elements, so that non-consolidation of

the subsidiary would not affect rational judgments about financial conditions and operating result
of the business group, the subsidiary may not be consolidated.

II. The Balance Sheet Date of the Business Group

1. The accounting period for consolidated financial statements should be one year, of
which the balance sheet date should be chosen from any one day of within the period, with
reference to the accounting period of the parent.

2. If the accounting periods of the subsidiaries differ from those of the parent, the
subsidiaries should perform appropriate accounting procedures as of the balance sheet date of the
consolidated entity, which are essentially the same as the formal accounting procedures in
preparing financial statements.

If a difference in the balance sheet dates does not exceed three months, the consolidation may
be based on the unmodified financial statements of the subsidiary. In this case, only material
differences in accounting records related to intercompany transactions that arise from the
difference in balance sheet dates should be modified.
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III. Accounting Policies and Procedures of the Parent and Subsidiaries

In principle, accounting policies and procedures for similar transactions under similar
circumstances should be unformed among the parent and subsidiaries.

Guidelines for Preparing Consolidated Balance Sheets

I. Basic Principles for Preparation of Consolidated Balance Sheets

A consolidated balance sheet should be prepared based on the amounts of the assets, liabilities,
and capital on the legal-entity balance sheets of the parent and subsidiaries, with premeasuring
assets and liabilities of the subsidiaries and offsetting the investments and net assets and rights
and obligations among consolidated entities.

II. Remeasurement of Assets and Liabilities of Subsidiaries

1. Assets and liabilities of a subsidiary should be premeasured at fair value as of the date
of acquisition of the control, based on the following alternative methods:

a. A portion of the assets and liabilities of the subsidiary that is attributed to the parent's
interest is marked to fair value as of the dates of the investments, and the remaining portion of
the assets and liabilities that is attributed to the minority interest is carried over with the book
amounts on the legal-entity balance sheet. (Hereafter, the "partial fair value method").

b. Full portion of the assets and liabilities of the subsidiaries is marked to fair value as of
the acquisition of the control (hereafter, "full fair value method").

Even when a reporting entity adopts the partial fair value method, the portion of assets
and liabilities of the subsidiary that is attributed to the parent may be premeasured at the date of
acquisition of the control if such procedure does not affect in material respects the result of
consolidation.

If an acquisition date of shares or control differs from the balance sheet date of the
subsidiary, the acquisition may be supposed to be done at the nearest balance sheet date from the
acquisition date.

2. The differences of fair values and book amounts of assets and liabilities of the
subsidiary (hereafter, "remeasurement differences") should be included in capital of the
subsidiary.

3. If the remeasurement differences are immaterial, the assets and liabilities of the
subsidiary may be carried over with the book amounts.
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III. Offsetting Investments and Net Assets

1. Investments by a parent in its subsidiary and the corresponding net assets of the
subsidiary should be offset and eliminated for consolidation purpose.

2. If there is a difference between the investments by a parent in its subsidiary and the
offsetting net assets of the subsidiary, the difference should be accounted for as a consolidation
adjustment (goodwill).

A consolidation adjustment should be amortized over no more than 20 years after the
acquisition by the straight-line method or other appropriate methods. If the amount of the
consolidation adjustment is immaterial, the amount may be recognized as a gain or loss of the
period of the acquisition.

3. The investments and the net assets between subsidiaries should be offset, as if the
offset is between a parent and its subsidiary.

IV. The Minority Interest

1. A portion of the net assets that is not attributed to the parent should be attributed to the
minority interest.

Stated and additional paid-in capital and retained earnings as of acquisition date of shares
or control should be divided into the portion attributed to the parent and the portion attributed to
the minority shareholders. The former portion should be offset with the investment by the parent
and eliminated, and the latter portion should be accounted for as the minority interest.

2. If accumulated losses of a subsidiary that would otherwise be attributed to the minority

interest exceed the accumulated amount of the minority interest should be attributed to the
parent's interest. In this case, if the subsidiary raises net income in succeeding periods, the
income should be attributed to the parent's interest until the accumulated losses that have
previously been attributed to the parent are recovered.

3. Retained earnings earned after the acquisition date of shares or control that are
attributed to the minority shareholders should be accounted for as minority interest.

V. Offsetting Rights and Obligations

Rights and obligations among consolidated entities should be offset and eliminated for
consolidation purposes.

 The rights and obligations to be offset include accrued or deferred revenues or expenses
that have arisen from intercompany transactions.
 If a note issued by a consolidated company is refunded at a bank by another consolidated
company, the note should be transferred into debt account on the consolidated balance
sheet.
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  Provisions for credit losses should be reconciled to the amount corresponding to the
consolidated loans after the offset of rights and obligations between consolidated
companies.
 Provisions for which it is clear to be recognized for consolidated companies should be
eliminated for consolidation purposes.
 If a consolidated company acquires temporally any debt securities issued by another
consolidated company, the debt securities may not be offset.

Guidelines for Preparation of Consolidated Income Statements

I. Basic Principle for Preparation of Consolidated Income Statement

A consolidated income statement should be prepared based on the amounts of revenues and
expenses on legal-entity income statements of the parent and subsidiaries, with eliminating
intercompany transactions among consolidated entities and unrealized gains and losses on the
transactions and applying other related procedures.

II. Eliminating Intercompany Transactions among Consolidated Entities

Items related to intercompany transactions between the parent and its subsidiary or among
the subsidiaries should be eliminated.

Even when transactions between consolidated companies are performed through any
unrelated companies, the transactions should be accounted for as if they are related transactions
between consolidated companies, if the transactions are clear to be in substance related
transactions.

III. Eliminating Unrealized Gains and Losses

1. Unrealized gains and losses included in inventories, fixed assets, or other assets that
are obtained by intercompany transactions among consolidated entities should be eliminated. For
unrealized losses, however, if the cost before eliminating the unrealized losses is not recoverable,
the unrealized losses should not be eliminated.

2. Immaterial unrealized gains or losses may not be eliminated.

3. If there is a minority interest in the selling subsidiary, the unrealized gains and losses
should be allocated between the parent's interest and the minority interest based on the
proportionate ownership of the parent's interest and the minority interest.
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Guidelines for Preparation of Consolidated Statements of Retained Earnings

I. Preparation of Consolidated Statements of Retained Earnings

1. For consolidated retained earnings carried on the consolidated balance sheet, a

consolidated statement of retained earnings, which display changes in the earnings, should be
prepared.

2. Changes in consolidated retained earnings should be calculated based on legal-entity

consolidated income statements and the appropriations of retained earnings of the parent and its
subsidiaries, with eliminating intercompany payments and receipts of dividends among
consolidated entities.

3. Consolidated amounts of appropriations of retained earnings should be calculated

based on the appropriations of the parent and its subsidiaries that are performed during the
consolidated accounting period. However, the consolidated amounts may be calculated based on
the appropriations of the parent and its subsidiaries that relate to the earnings of the accounting
period.

Elimination:

Other key transactions that a parent company must eliminate when preparing consolidated
financial statements are

 Investments in the subsidiary: The parent company's books show its investments in a
subsidiary as an asset account. The subsidiary's books show the stock that the parent
company holds as shareholders' equity. Rather than double-counting this type of
transaction, the parent company eliminates it on the consolidated statements by writing off
one transaction.
 Interest revenue and expenses: Sometimes parent company loans money to a subsidiary
or subsidiary loans money to a parent company; in these business transactions, one
company may charge the other one interest on the loan. On the consolidated statements,
any interest revenue or expenses that these loans generate must be eliminated.
 Advances to subsidiary: If a parent company advances money to a subsidiary or a
subsidiary advances money to its parent company, both entities carry the opposite side of
this transaction on their books (that is, one entity gains money while the other one loses it,
or vice versa). Again, companies avoid the double transaction on the consolidated
statements by getting rid of one transaction.
 Dividend revenue or expenses: If a subsidiary declares a dividend, the parent company
receives some of these dividends as revenue from the subsidiary. Any time parentcompany
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 records revenue from its subsidiaries on its books, the parent company must eliminate any
dividend expenses that the subsidiary recorded on its books.
 Management fees: Sometimes a subsidiary pays its parent company a management fee for
the administrative services it provides. These fees are recorded as revenue on the parent
company's books and as expenses on the subsidiary's books.
 Sales and purchases: Parent companies frequently buy products or materials from their
subsidiaries or their subsidiaries buy products or materials from them. In fact, most
companies that buy other companies do so within the same industry as a means of getting
control of a product line, a customer base, or some other aspect of that company's
operations.

Difference:
The difference between consolidated and non-consolidated financial statements is that the
consolidated financial statement consists of the financial statements of parent company and its
subsidiaries. While the non-consolidated statements consists of the separated financial
statement of parent and its subsidiaries.

Equity in Earnings of Nonconsolidated Subsidiaries:-

When a firm accounts for its investments in stocks using the equity method, the investor
reports equity earnings (losses). Equity earnings (losses) are the investor’s proportionate share of
the investee’s earnings (losses). If the investor owns 30% of the stock of the investee, for
example, and the investee reports income of $150,000, then the investor reports $45,000 on its
income statement. The term equity earnings will be used unless equity losses are specifically
intended. To the extent that equity earnings are not accompanied by cash dividends, the investor
reports earnings greater than the cash flow from the investment. If an investor company reports
material equity earnings, its net income could be much greater than its ability to pay dividends or
cover maturing liabilities. For purposes of analysis, the equity in the net income of
nonconsolidated subsidiaries raises practical problems. For example, the equity earnings
represent earnings of other companies, not earnings from the operations of the business. Thus,
equity earnings can distort the reported results of a business’ operations. For each ratio
influenced by equity earnings, this book suggests a recommended approach described when the
ratio is introduced.

Minority Share of Earnings:-

If a firm consolidates subsidiaries not wholly owned, the total revenues and expenses of
the subsidiaries are included with those of the parent. However, to determine the income that
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would accrue to the parent, it is necessary to deduct the portion of income that would belong to
the minority owners. This is labeled “minority share of earnings” or “minority interest.” Note
that this item sometimes appears before and sometimes after the tax provision on the income
statement. When presented before the tax provision, it is usually presented gross of tax. When
presented after the tax provision, it is presented net of tax. In this book, assume net-of-tax
treatment.

Bibliography:-

http://en.wikipedia.org/wiki/Consolidated_financial_statements

http://wiki.answers.com/Q/
What_is_the_steps_to_prepare_consolidated_financial_statements

http://www.dummies.com/how-to/content/reading-consolidated-financial-statements.html

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