Consolidated Financial Statements: Answers To Your Questions (Part 3 of 3)

Consolidated financial statements

Where a group of companies are in place, it may be necessary for the group to prepare consolidated financial statements. The purpose of these financial statements is to present the figures of the group as if it were one single economic entity. Some of the fundamental points of consolidations are set out below;

Transactions between group companies

One of the fundamental principles of preparing consolidated accounts is that the companies being consolidated are treated as if it were one standalone entity. This means that any transactions between the group companies must be eliminated from the group results.

So if, for example, Company A and Company B are being consolidated and Company A sells goods costing €10,000 to Company B for €12,000 then both the sale and purchase of €12,000 must be eliminated when performing the consolidation. If this is not done then consolidated sales and purchases would be overstated. If Company B were to sell the goods to a company outside the group for €14,000 then the profit to the group would be €4,000 (being the €14,000 selling price less the original purchase of the goods into the group for €10,000).

Dividends paid between group companies

Any dividends paid between group companies should be eliminated so that all that remains in the consolidated financial statements are the dividends received from outside the group and the dividends paid to companies or individuals outside the group.

Similarly, group loans should also be eliminated on consolidation.

Where the individual companies prepare accounts using different presentation currencies, this elimination may give rise to a foreign exchange difference.

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