Consolidated financial statements present a parent and its controlled subsidiaries as one economic entity under U.S. generally accepted accounting principles (GAAP). Transactions within that entity cannot create consolidated revenue, receivables, or profit merely by moving resources between group members.
For an ordinary voting-interest corporation, ownership exceeding 50% generally establishes control, subject to substantive rights and restrictions. The preparer must investigate contrary evidence before selecting the entities whose balances enter consolidation.
A noncontrolling interest (NCI) represents subsidiary equity attributable to owners outside the consolidated group. A wholly owned subsidiary has no NCI, but both wholly owned and partially owned controlled subsidiaries contribute 100% of their assets, liabilities, revenues, and expenses.
HIGH-FREQUENCY: Ownership percentages allocate income and equity after consolidation. A controlled subsidiary's inventory, sales, and liabilities enter at 100%.
To prepare consolidated financial statements from supporting documentation, the preparer starts with adjusted parent and subsidiary trial balances. A consolidation worksheet combines those balances and records group-level adjustments without posting ordinary eliminations to either entity's legal books.
Common mistakes
- Proportional assets. Reporting 80% of the subsidiary's inventory confuses ownership allocation with consolidation; the entire $12,000 unrealized profit is deferred.
- Unsupported implied value. The draft's $100,000 acquisition NCI exceeds the supplied valuation by $10,000 and overstates goodwill by the same amount.
- Duplicate payable. Posting another $4,000 for the legacy vendor invoice duplicates a liability already included in the control account.
Bottom line
- Consolidate 100% of controlled subsidiaries' balances and present noncontrolling equity separately.
- Eliminate the parent's investment and all acquisition-date subsidiary equity without adding subsidiary carrying amounts twice.
- Full goodwill uses consideration, independently measured NCI, any applicable prior-interest fair value, and identifiable net assets at required acquisition measurements.
- Include only postacquisition subsidiary earnings, adjusted for acquisition differences and consolidation eliminations.
Exam shortcut
Each supplied amount belongs to a source-book balance, acquisition measurement, or worksheet adjustment. The purchase-entry status of the parent column determines whether the cash payment has already been recorded. Inventory analysis identifies the seller, the cost or selling-price denominator, and the entire remaining profit before applying ownership percentages. Separate equipment schedules compare the buyer's recorded depreciation with the group's historical depreciation. Their difference controls the recurring adjustment.
The full lesson (about 8,599 words, 57 min read) adds 4 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.A6
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