A regular process for every organization is to generate their financial statements to evaluate their performance or state for a specific period of time. When a company has acquired other entities and a group is formed, then generating the overall view of the organization becomes a bit more complicated because we need to generate Consolidated Financial Statements.
When a holding company needs to have the entire picture of its business and all its subsidiaries, we need to look at financial consolidation.
Keep in mind that different companies that belong to a group can have different services, processes and even different chart of accounts that will increase the complexity of the consolidation process.
As a holding company, I want to see the total assets, liabilities, equity, expenses, etc. as a single unit to evaluate the overall health of the group.
In order to generate the Consolidated Financial Statements, we need to have a key information from the company relationship with its subsidiaries. That is the percentage ownership. Only the companies where the holding has control (meaning more than 50% ownership) will go to the Consolidated Financial Statements. Below 50% there are methods to reporting options (such as cost method or equity method) that you can use to show the overall picture.
Now let’s take a look at some examples within the different reports we can get as part of the Consolidated Financial Statements:
Profit and Loss: this statement needs to take into account the relationship between parent and subsidiary as well as the relationship between the subsidiaries. If a revenue of one is based on the expense of the other (i.e. within the group one company buys goods from another company), those need to be evaluated/eliminated because we want the net value for the parent company.
Balance Sheet: this statement has a similar scenario. If the account receivables of one company are based on an account payable of another company of the same group, then we need to eliminate the amount when we want to show the overall state of the holding company.
You might find cases where a subsidiary is not consolidated to the holding company, even when they own more than 50% of the stocks. This could happen if the business of the subsidiary is completely different and independent from the parent company.
In many cases, the financial consolidation process is repetitive and, like many other iterative processes, can be automated based on some business rules that use parameters to perform all tasks and generate the Consolidated Financial Statements.
You can also check some additional information in the investopedia website