Definition
Consolidated financial statements present the parent and its controlled subsidiaries as a single economic entity, eliminating intercompany balances and transactions and showing any noncontrolling interest. Combined financial statements add up entities under common control or common management where no entity owns another, for example sister companies owned by the same individual. Intercompany items among them are eliminated in the same way, and the basis of combination is disclosed. ASC 810 governs consolidation, and combined statements are generally prepared by analogy.
Why it matters in an audit or review
Auditors establish the reporting entity and confirm that the scope is complete, since leaving out a related entity can misstate liabilities and related-party exposure. They test eliminations and the consistency of accounting policies across entities. Component work is addressed under group audit requirements.
Example
(Illustrative) Two companies owned 100% by the same individual each have $500,000 of revenue, including $80,000 of sales between them. Combined revenue is $1,000,000 - $80,000 = $920,000.
Common mistakes
- Not eliminating intercompany receivables and payables.
- Mixing reporting dates without adjustment.
Sources
- FASB ASC 810-10, Consolidation, Overall (consolidation, intra-entity eliminations, noncontrolling interests)
- AICPA, AU-C Section 600 (group audits), as revised by SAS No. 149
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error