Why groups consolidate
Adding the entities of a group together counts the same goods twice. A sale from one entity to another is revenue for the seller and a cost for the buyer, and nothing left the group, so the sum overstates both. Consolidation removes those internal effects and presents the group as one economic unit. It also answers what the sum leaves open: which entities belong in the group’s reporting, and how the result splits between the parent’s owners and the non-controlling part.
How the consolidation process runs
- Define the perimeter. The perimeter is the set of entities that enter the group’s reporting, and control is the criterion behind it. Joint control and significant influence carry their own treatment.
- Align the accounting criteria and aggregate. Entities may keep their books under different accounting policies and in different currencies. Those criteria are aligned, the presentation currency is fixed, and the statements are then added line by line. A fully integrated entity enters at full value, not at the fraction of capital the group owns.
- Remove internal effects and separate the rest. Operations between entities inside the perimeter come out, so the group does not report revenue and cost it produced with itself. The part of the result and of the net assets that belongs to shareholders outside the group is presented separately as the non-controlling interest. The output is a complete set of statements with notes, not an internal management report.
Example: a subsidiary integrated in full and partly separated
Tavistock Group holds 75 percent of Pinewood Freight and controls it, so Pinewood enters the consolidation in full. The figures are illustrative and stated in US dollars. Pinewood’s net result for the year is USD 250,000, and Tavistock’s own net result is USD 600,000. Assume the parent’s stated profit excludes income from the subsidiary and there are no further consolidation adjustments.
Pinewood is not scaled down to the group’s share. Its whole result enters the group’s figures, and the fraction the group does not own is separated afterwards: 25 percent of USD 250,000 = USD 62,500, presented as the result attributable to non-controlling interests. The owners of Tavistock keep USD 250,000 – USD 62,500 = USD 187,500.
The group result is USD 600,000 + USD 250,000 = USD 850,000, split in two lines: USD 600,000 + USD 187,500 = USD 787,500 for the owners of the parent, and USD 62,500 for the non-controlling interest. Those two lines add back: USD 787,500 + USD 62,500 = USD 850,000.
Control and the treatment of investments
| Method | Criterion | What enters the group’s statements |
|---|---|---|
| Consolidation | Control of a subsidiary | Combine the subsidiary’s statements line by line and distinguish noncontrolling interests. |
| Equity method | An associate or a joint venture, under the applicable reporting framework | Present the investment on one line and recognize the share of its results, with the required adjustments. |
| Joint operation | Rights to assets and obligations for liabilities | Recognize the relevant assets, liabilities, revenue and expenses according to those rights and obligations. |
The method decides how much of an entity’s figures enters the group’s set. Which one applies depends on the control assessment and on the reporting requirements involved.
Where consolidation ends and its neighbors begin
The close finishes the books of one period; consolidation produces the group’s set from the entities in the perimeter. Intercompany accounting is the record keeping between entities and the elimination entry neutralizes one internal balance, so neither is the process. Fiscal consolidation is a tax regime and treasury consolidation aggregates cash positions.
Financial close and consolidation is the phrase teams use for the whole cycle, and close and consolidation name the two jobs inside it.
Reviewing the balances before they enter the group figures
The consolidation team needs to know whether an entity’s submitted balance has been reviewed and why it differs from the supporting detail. Simetrik’s balance review and certification organizes that evidence by account and period, with an owner for each unresolved variance.
This review supports the inputs to consolidation. The group’s control assessment, currency translation, non-controlling interests and consolidation adjustments still require their own accounting process. A reciprocal balance discrepancy can be investigated through intercompany reconciliation before it reaches the group reporting package.