Someone recently asked me whether I knew about consolidations. That gave me an idea, why not write about what I know about consolidations, so here we go.
Consolidations means combining multiple entities financials into one combined financial. Two questions come up about that: why do we need it and how do we do it. I can go on and on about both these questions but would keep it to at a high level.
Why consolidations: In the world of globalization, there are a lot of companies that have a parent company in one country and subsidiaries in another country/ies. The question to investors and senior management is not only how individual entities are doing but also how everyone combined is doing. And that is the one of the main reason for consolidations.
How to do consolidations: When the financials of the multiple entities are added, a new entity is created called the elimination entity. The purpose of this entity is to eliminate any inter-company transactions that the entities are entering into. Biggest ones are:
Inter-company investments: The parent would start the subsidiary by investing in the company. This is eliminated by DR Capital (showing on the Subs financials) CR Investment in Sub (Showing on parent company financials)
Inter-company sales: Either the parent or the subsidiary would sell to each other, in that situation, elimination entry will be DR Revenue (showing on the selling party’s financials) CR Expenses (showing on buying party’s financials). If the sales is done on credit, elimination would also include DR Inter-company payable CR Inter-company receivable.
Inter-company loans: When one company lends to another, elimination is done by DR Inter-company loan payable CR Inter-company loan receivable.
Obviously this is a very simplistic approach to the consolidations. My goal is to give you an overview of the process.
