Difference between consolidated management accounts and group unaudited financial statements

What is consolidation management?

Consolidation management allows the consolidation of data between multiple organizations while also maintaining separate books for taxes and operating.

Consolidated accounting and management accounts

Consolidated accounting adjusts and combines financial information that is gathered from individual financial statements of the parent company and its subsidiary businesses. The goal of it is to present financial information for the group as a single economic entity.

Furthermore, consolidated management statements layout the performance and financial state of a group of companies as if they were a single enterprise.

These consolidated management statements have two key purposes (as opposed to the statutory consolidated financial statements). These are:

  1. Responding to regulatory obligations by analyzing financial statements and management reports. Hence, it is essential for report creators to provide extra-accounting information (quantitative information regarding sales, production, and so on).
  2. Frequent data analyses (on a monthly or quarterly basis) in advance of financial statement closing. For this reason, it is important to consolidate the financial statements fast and integrate data with manual adjustments.

What are consolidated financial statements?

Consolidated financial statement figures derive from consolidated management accounts. 

The difference between a standalone financial statement and a consolidated financial statement is the consolidated financial statements present to the readers the Group’s results in the same currency and also eliminated any transactions and balances within the Group.

One can look at a consolidated financial statement to see whether the combined entity is financially sound. This kind of statement shows the overall economic wealth of the parent company and its subsidiaries joined together. The parent company can, in turn, show how much money it controls. 

For instance, if the parent company does not make as much money as its subsidiaries, the parent company and its subsidiaries together show how much more this conglomerate is worth than the parent company is worth alone.

If the parent company owns more than 50% of a subsidiary, the accounting department has to prepare a consolidated financial statement instead of a combined financial statement.

In a simpler language, consolidated financial statements combine the financial statements of separate legal entities that are under the jurisdiction of a single parent company into one for the whole group of companies.

What is the purpose of consolidated financial statements?

The purpose of consolidated financial statements is to aggregate the financial position of a parent company and its subsidiaries. This allows an investor to understand the overall health of the company as a whole instead of separately viewing the individual company’s financial statements. 

To put it simply — these statements agglomerate the results of the subsidiary businesses into the parent company’s income statement, balance sheet, and cash flow statement.

Are consolidated financial statements required?

This kind of statement is required when two related companies are involved. This can include either a subsidiary company or a company with joint ownership. In a consolidated financial statement, we eliminate intercompany transactions. 

Let’s take a holding company and an operating company as a subsidiary for example.

The holding company charged a rental invoice to the operating company, resulting in the holding company recognised a rental income and the operating company recognised a rental expense. In a consolidated statement, we eliminate the expense (to the operating company) and revenue (to the holding company). 

This is done to avoid marking up of revenue and expenses. Additionally, this gives a more complete picture of the financial situation.

Who is required to prepare consolidated financial statements?

Since the consolidated financial statements are considered as the primary financial statements from an economic entity perspective, corporations have to prepare them in order to achieve a true and fair view of the position of the company.

Hence, consolidated financial statements shall be prepared and laid before the annual general meeting. 

In case a company has one or more subsidiaries, it needs to prepare a consolidated financial statement of the company and all of the subsidiaries in the same form to be laid before the AGM of the company.

Bear in mind that subsidiaries are all entities over which an enterprise has control of. The enterprise or corporation controls an entity when it is exposed to or has rights to variable returns from its involvement with the entity and has the ability to affect the returns through its power over the entity.

Subsidiaries are fully consolidated starting from the date when control is transferred to the parent company. They stop being consolidated once the control ceases.

How to prepare consolidated financial statements?

There are a few steps that you need to follow when preparing consolidated financial statements.

  1. Combining balance sheets such as assets, liabilities equity, income, and cash flow between the parent company and its subsidiaries. Also to convert different currencies into the same presentation currency (if it has foreign operations).
  2. Offsetting/removing the carrying amount on parent’s investment in the subsidiaries and the parent equity holdings in each subsidiary.
  3. Finally, elimination of/removing inter-company assets, liabilities, and equity in the balance sheet along with expenses and transactional flows between entities of a given group (the parent and its subsidiaries).

The output of this process with combined figures (including workings) is reflected in Consolidated Management accounts, which are usually exported as Excel files.

The ultimate figures in consolidated management accounts shall be presented in the unaudited or audited financial statements.

This is compliant with Sections 201(2) and 201(5) of the Companies Act. Directors are responsible to present the statements and lay them out before the company at the AGM. The statements need to comply with Accounting Standards issued by the Accounting Standards Council.

Finally keep in mind that financial statements include:

  • Statement of comprehensive income
  • Statement of financial position
  • Statement of changes in equity
  • Statement of cash flow
  • Notes to the accounts disclosing the accounting policies as well as detailed information of the items disclosed in the statements listed above

What are group unaudited financial statements?

A combined/group financial statement treats each subsidiary as a separate entity on paper. The financial statement reports the finances of the subsidiaries and the parent company separately. 

However, this is combined into one document. Within that document, the parent’s and subsidiaries’ financial statements are still distinct.

An unaudited financial statement has not yet been subjected to an independent verification and review process. It remains unaudited until a certified external auditor scrutinizes and approves it.

People usually don’t have a hard time preparing combined financial statements compared to consolidated financial statements. From the investor’s point of view, it is easy to analyze the results and gauge the performance of the individual subsidiary companies separately.

All companies apart from small companies and dormant companies are required to file audited reports to the governing authority.

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