Consolidated financial statement

A consolidated financial statement (CFS) is the "financial statement of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent company and its subsidiaries are presented as those of a single economic entity" (IFRS 10 Appendix A), according to the definitions stated in International Accounting Standard 27, "Consolidated and separate financial statements" (IAS 27.4), and International Financial Reporting Standard 10, "Consolidated financial statements" (IFRS 10.2).

According to IAS 1.10, a complete set of consolidated financial statements comprises  

Consolidated accounts are prepared after the accounts for the constituent companies have been prepared. While preparing a consolidated financial statement, there are two basic procedures that need to be followed: first, cancelling out all the items that are accounted as an asset in one company and a liability in another, and then adding together all uncancelled items (IFRS 10.B86).

There are two main type of items that cancel each other out from the consolidated statement of financial position.

In the United Kingdom, section 399 of the Companies Act 2006 requires parent company directors to prepare group accounts unless an exemption applies (UK Companies Act 2006 s.399). Small groups are exempt, where total net assets are below £5.1m, annual turnover is less than £10.2m, or the average number of employees is below 50 (UK Companies Act 2006 s.398). Two of these three conditions must be met. For entities not following IFRS, these requirements are further detailed in the Financial Reporting Standard applicable in the UK and Republic of Ireland (UK GAAP FRS 102 Section 9).

For listed companies, section 403 of the Companies Act 2006 mandates the preparation of group accounts in accordance with UK-adopted international accounting standards (UK Companies Act 2006 s.403). Following the UK's exit from the European Union, these accounts must comply with standards endorsed by the UK Endorsement Board (UKEB) for financial years beginning on or after 1 January 2021 (SI 2019/685). The primary legislative driver for consolidation under this framework is IFRS 10, which replaces ownership-based definitions with a single "control" model (IFRS 10 Appendix A). Control is established when a parent possesses power over an investee, exposure to variable returns, and the ability to influence those returns through its power (IFRS 10.7). Once a company elects to prepare IFRS group accounts, section 403(4) requires continued use of this framework unless a relevant change in circumstances occurs (UK Companies Act 2006 s.403(4)).

Goodwill is treated as an intangible asset (IAS 38.8) in the consolidated statement of financial position. It arises in cases where the cost of purchase of shares is not equal to their par value (IFRS 3.32). For example, if a company buys shares of another company worth $40,000 for $60,000, there is a goodwill worth $20,000.

According to IFRS 3.32, goodwill is determined by measuring the difference between the aggregate of the consideration transferred and the net of the acquisition-date amounts of the identifiable assets acquired.