Accounting processes can get complex when a parent company has to consolidate its subsidiaries. Each entity may have separate procedures and documentation methods, making it difficult to report on the big picture.
One of the accounting processes that requires big-picture reporting for the whole organization is producing a consolidated income statement. What is it, what goes into it, and what are the best practices? In this article we’ll break everything down, so your team can jump in confidently.
A consolidated income statement is one of the three main financial consolidation reports an organization must produce. The other two are balance sheets and cash flow statements.
The combined gains, losses, expenses, and revenues of a parent company and its subsidiaries presented in a report make a consolidated income statement. This statement provides key insight into a company’s profitability and financial health.
Companies must usually prepare a consolidated income statement to meet compliance laws and standards within their jurisdiction.
In addition to meeting compliance standards, companies create consolidated income statements to provide stakeholders and investors with an overview of the company’s financial health, profitability, and any equity changes.
A consolidated income statement requires each entity to comply with applicable accounting standards for their jurisdiction. Each entity must gather and combine all financial information, eliminate intra-group transactions, consider and adjust for unrealized profits and losses, and disclose any additional information relevant to the financial processes of any entity.
A business needs to create a consolidated income statement under two conditions. First, if a parent company has 50% or more ownership of a subsidiary. Second, if a parent company has less than 50% ownership, but still has at least a controlling interest in the subsidiary.
An unconsolidated income statement treats the parent company and each subsidiary as separate entities from an accounting perspective. A consolidated income statement is the combination of all statements into one overview.
Income consolidation involves gathering combined financial statements related to revenue, expenses, losses, and gains. These documents may differ depending on the jurisdiction or nature of your business.
To calculate consolidated income, you need to combine the totals for gains, losses, revenues, and spending for each entity. Then, you must eliminate intra-group transactions and adjust for unrealized profits and losses to arrive at your final figure.
The exact line items within the statement may vary between organizations, so we’ll break this down more broadly.
All revenue generated by the parent company and each subsidiary should be included for the applicable reporting period. You should also include the net income of the business as a whole in this section.
Revenue documentation may include transaction records, invoices, reconciliations, and more.
Expenses on your consolidated income statement will include operating expenses from the parent and subsidiary companies as well as the combined cost of sales. Expense costs will include all overhead costs like staffing, administration, and operations costs.
The gross profit of the business, operational profits, and any income from discontinued operations should be included as line items in the gains section.
Losses on consolidated income statements will be calculated by subtracting expenses from revenues, for both operating and non-operating activities.
Notes to the consolidated income statement detail the assumptions from the accountant during the preparation phase. These notes may include accounting policy information, methodology, and any additional context a stakeholder may need to understand the statement.
Let’s take a look at an example of a consolidated income statement.
The lines are broken up into the following categories:
Sales: In this example, this section includes the total amount brought in with sales, the cost of materials required to make these sales, and changes in inventory.
Operating income: Administrative costs, distribution costs, and exceptional operating profits/losses belong in this section, with the net income for the year being calculated at the end.
Attributable to: This section breaks down the income coming from the parent companies and what comes from smaller, non-controlling interests.
Of course, the line items on your business’ consolidated income statement may vary from this example and could be a little more simplified or more granular.
Earlier in this article we mentioned that aside from wanting to give stakeholders and investors an overview of financial performance, some companies must complete a consolidated income statement based on jurisdictional requirements. In this section, we’ll go over some specific requirements that may be applicable to your organization.
The Financial Accounting Standards Board (FASB) has Generally Accepted Accounting Principles (GAAP) that US organizations need to adhere to to maintain accounting consistency from one publicly traded company to another. These standards are outlined in 10 basic principles:
The International Financial Reporting Standards (IFRS) is similar to GAAP in that it’s an established set of standards to maintain accounting consistency across organizations. More specifically, the IFRS has established standards for different accounting practices. The IFRS 10 outlines specific standards for consolidated income statements. They are:
For organizations operating in the United Kingdom, directors must meet the requirements under the Companies Act 2006. Each entity must appoint a director, and their duties include:
The director is required to produce a financial report under the Companies Act. A more complete list of requirements can be found here.
Now that we know what a consolidated income statement is, and what to include, how do we go about actually making one? While there are no definite right or wrong steps, here are some best practices to keep in mind.
Simplify the process with software
Manual collection, calculation, recording, and presenting of your income statement will be a long and tedious process. A financial performance platform will accelerate all of these steps, along with helping train your team, meet compliance standards, and provide top-notch filing for your organization in the future.
Make sure your accounting processes are consistent
Do all of the entities in your organization follow the same filing, compiling, and reporting processes? If so, gathering the data to complete the income statement is going to be much more streamlined.
Make sure your team is trained and empowered
Does your finance team have access to all of the reporting tools they need, and are they on the same page about the consolidation process? Have them align on the steps your organization is going to take, along with what bottlenecks they may encounter in the process.
Creating consolidated income statements can be overwhelming, but it doesn’t have to be. With financial software like Prophix One, the compiling, summarizing, and reporting of your consolidated income statement will be streamlined and automated. Learn more about how Prophix One can support your financial consolidation process in this short video.
Ambitious finance leaders engage with Prophix to drive progress and do their best work. Leveraging Prophix One, a Financial Performance Platform, to improve the speed and accuracy of decision-making within a harmonized user experience, global finance teams are empowered to step into the next generation of finance with no reservation.
Crush complexity, reduce uncertainty, and illuminate data with access to best-in-class automated insights and planning, budgeting, forecasting, reporting, and consolidation functionalities. Prophix is a private company, backed by Hg Capital, a leading investor in software and services businesses. More than 3,000 active customers across the globe rely on Prophix to achieve organizational success.
