What is a consolidated balance sheet? Definitions and examples

Consolidated balance sheets are an essential part of financial consolidation. They help give investors and partners more visibility on a company's entire financial situation, including relevant subsidiaries, meaning they can go to one document instead of sifting through multiple statements.

Here's how these statements are prepared, and some important best practices to keep in mind.

What is a consolidated balance sheet?

A balance sheet is a document that reflects the total assets and liabilities of an organization. A consolidated balance sheet allows an organization to include the assets and liabilities of its subsidiaries in a single balance sheet.

A parent company can only create a consolidated balance with subsidiaries when it owns a majority stake in them (i.e. more than 50%) or can prove that the subsidiary’s leadership is significantly aligned with decisions made by its own.

Why do companies need to create a consolidated balance sheet?

Companies typically create consolidated balance sheets for one of two reasons:

• Tax purposes: Typically, the decision to create consolidated or unconsolidated balance sheets is usually made annually for tax purposes. A parent company may decide to consolidate its balance sheet to offset record profits with losses from a subsidiary, for example.

• Structural changes: In some situations, a significant change in corporate structure may prompt a company to switch from consolidated to unconsolidated balance sheets or vice-versa. This is especially true with public companies, which often make more long-term decisions regarding consolidation.

What are the requirements for a consolidated balance sheet?

For a company to include a subsidiary in a consolidated balance sheet, one of two requirements must be true:

• The parent owns a majority stake in the subsidiary: This means more than 50% is owned by the parent company.

• The parent can demonstrate significant alignment with the subsidiary: Even if the parent company owns 50% or less of the subsidiary, it may be able to show that the subsidiary’s leadership is essentially following the leadership of the parent company, meaning it has significant influence over day-to-day operations.

When does a business need a consolidated balance sheet?

If an organization is using consolidation accounting, then its balance sheets must be consolidated as well. As far as the overall decision to consolidate, when this “needs” to happen depends on whether a company is private or public.

• Private companies are generally free to choose whether they want to use consolidation accounting or not—and therefore prepare consolidated balance sheets.

• With public companies, pressure from investors and other groups may make consolidated balance sheets more of a necessity than for private companies.

What's the difference between a consolidated balance sheet and an unconsolidated balance sheet?

A consolidated balance sheet is contrasted with an unconsolidated balance sheet, which only lists the assets and liabilities of a single entity, whether that’s the parent company or a subsidiary.

What are the components of a consolidated balance sheet?

A consolidated balance sheet has the same elements as a typical balance sheet, only they’ll represent the entire entity, including subsidiaries it owns a majority stake in.

Vermögenswerte

The parent company’s assets are combined with those of its subsidiaries in a consolidated balance sheet. They’re listed in decreasing order of liquidity, or how easily they can be turned into cash. Examples of assets include:

• Cash and its equivalents
• Marketable securities
• Forderungen
• Inventar
• Long-term investments
• Fixed assets

Verbindlichkeiten

Liabilities represent money owed by a company to other entities that aren’t part of its ownership structure. In a consolidated balance sheet, liabilities from subsidiaries are added to the balance sheet of the parent company. Liabilities are usually grouped into two categories. Current liabilities are due within a year, while long-term liabilities are due beyond one year. Examples of liabilities include:

• Darlehen
• Interest payable
• Wages payable
• Customer prepayments
• Dividends payable
• Kreditoren-
• Deferred tax liabilities

Shareholder equity

This category represents anything the company owes to its shareholders. Usually, these are assets left over after the parent company has subtracted all liabilities from its total assets.

Notes to the consolidated balance sheet

This section often has significant differences between consolidated balance sheets and their unconsolidated counterparts. Usually, this provides additional context about financial statements that investors, partners, and other interested parties rely on to understand the figures they’re looking at.

In a consolidated balance sheet, these notes will also name the subsidiaries that have been consolidated while informing the reader that inter-company transactions have been removed (more on that in a minute). It may also provide additional context about the specific ownership structure involved.

Reporting requirements for consolidated balance sheets

Depending on the jurisdiction a company operates in—and the extent of its international activities—it may fall under different reporting requirements when creating consolidated balance sheets.

FASB's GAAP requirements

Generally Accepted Accounting Principles (GAAP) apply to American public companies. ASC 810 is the specific accounting standard covering consolidation, and its requirements cover elements like:

• How to determine when a subsidiary can be consolidated (beyond percentage ownership)
• Definitions of the two key models used to define a controlling interest
• The definition of a business

IFRS requirements

Entities operating outside the United States usually refer to International Financial Reporting Standards (IFRS) for account requirements. Financial consolidation is covered under IFRS 10 which defines, among other things:

• The principle of control and how it’s measured
• Accounting requirements for the actual preparation of a consolidated balance sheet
• Exceptions for investment entities and other types of subsidiaries

Companies Act 2006

Only applicable in the United Kingdom, Companies Act 2006 covers a swathe of business practices and requirements. Part of this act are requirements for consolidation, including:

• Applicable exceptions
• Consistency of financial reporting within a consolidated entity
• Accounting frameworks for consolidation

How to create a consolidated balance sheet

No matter how large the organization or how automated the process, creating a consolidated balance sheet generally follows these steps.

1. Identify entities to consolidate

Before you start gathering any of the data you need, your finance teams need to identify the entities that need to be consolidated. There’s nothing worse than beginning a full consolidated balance sheet and finding out that, technically, a parent company doesn’t own enough of a subsidiary to consolidate it. Ensure that all entities to be consolidated should be consolidated before going through the rest of the process.

2. Combine the balance sheets of the parent company and its subsidiaries

Perhaps the most time-consuming step of the consolidation process is combining all assets and liabilities from every subsidiary into the parent company’s balance sheet. Significant resources and coordination are required to source financial information from multiple companies, ensure its accuracy, and add it to the platform—or spreadsheet—used by the parent company’s finance team.

3. Eliminate intercompany transactions and balances

In consolidated financial statements, intercompany transactions need to be eliminated before a final statement can be prepared. For example, if parent Company A sells inventory to subsidiary Company B, both the revenues from the sale and the cost of the inventory are removed from the balance sheet. Since money is moved between parent and subsidiary, it isn’t counted.

4. Allocate parent company investments

The parent company’s ownership of its subsidiaries needs to be represented across the subsidiary’s assets and liabilities, and this is done based on the percentage of the subsidiary owned by the parent. For instance, the shareholder equity of subsidiaries needs to be represented on a consolidated balance sheet as part of the parent company’s assets, and this is done by comparing the ownership percentage (51% or more) to the value of the subsidiary’s equity.

5. Adjust non-controlling interests

Non-controlling interests need to be represented on a consolidated balance sheet, referencing the percent of a subsidiary owned by the parent. If, for instance, Company A owns 60% of Company B, which has $100,000 in equity, then 40% of that amount ($40,000) will be represented as “non-controlling interests” on the final consolidated balance sheet.

6. Prepare disclosures

Depending on the reporting requirements involved in your consolidation, you may need to provide a significant number of disclosures to keep investors and regulators properly informed. For unconsolidated balance sheets, these disclosures might include the methods of depreciation used or the definition of cash equivalents. A consolidated balance sheet would require additional disclosures, like the consolidation method used and subsidiaries represented in the final balance sheet.

Consolidated balance sheet example

Now that you know how a balance sheet is prepared, let’s cover an example, step-by-step.

Step 1: Identify entities to consolidate

Parent Company A decides to prepare a consolidated balance sheet for this fiscal year. It currently owns shares in three subsidiaries:

• 51% of Company B
• 30% of Company C
• 100% of Company D

Since it doesn’t own a majority share of Company C—and can’t show significant alignment between its leadership and that of the subsidiary—only Companies B and D will be represented on the consolidated balance sheet.

Step 2: Combine balance sheets

After collecting the necessary financial information, the initial consolidated balance sheet looks like this.

Parent Company A:

• Assets: $2,000,000
• Liabilities: $500,000
• Shareholders’ Equity: $1,500,000

Parent Company B:

• Assets: $700,000
• Liabilities: $350,000
• Shareholders’ Equity: $350,000

Parent Company D:

• Assets: $500,000
• Liabilities: $200,000
• Shareholders’ Equity: $300,000

Initial Consolidated Balance Sheet

• Total Assets: $3,200,000
• Total Liabilities: $1,050,000
• Shareholders’ Equity: $2,150,000

But remember that these numbers aren’t correct quite yet. There are a few adjustments to make before the consolidated balance sheet can be finalized.

Step 3: Eliminate intercompany transactions

Intercompany transactions have to be eliminated to create an accurate consolidated balance sheet. To keep things simple, let’s assume that the extent of intercompany transactions between these entities is a sale of $100,000 worth of goods from Company A to Company B, which is also represented as a $100,000 liability for Company B since debt was used in the purchase. Removing this transaction, here’s our updated consolidated balance sheet.

Updated Consolidated Balance Sheet

• Total Assets: $3,100,000
• Total Liabilities: $950,000
• Shareholders’ Equity: $2,150,000

Step 4: Allocate parent company investments

The shareholder’s equity portion of the balance sheet needs to be allocated based on the ownership stake Company A has in each consolidated subsidiary. This is as simple as multiplying the shareholder’s equity of each subsidiary by the percentage representing that ownership.

Company B: $350,000 x 0.51 = $178,500

Company D: $300,000 x 1 = $300,000

With these figures added to Company A’s shareholder equity, the consolidated balance sheet is updated as follows:

Consolidated Balance Sheet with Investment Allocation

• Total Assets: $3,100,000
• Total Liabilities: $950,000
• Shareholder’s Equity: $1,978,500

Step 5: Adjust non-controlling interests

Finally, you’ll need to add non-controlling interests to your consolidated balance sheet. To do so, multiply the original shareholder’s equity for each subsidiary by the percentage of it the parent company doesn’t own.

Company B: $350,000 x 0.49 = $171,500

Company D: $300,000 x 0 = $0

Add a “Non-Controlling Interests” line to your consolidated balance sheet to get the following.

Consolidated Balance Sheet with Investment Allocation

• Total Assets: $3,100,000
• Total Liabilities: $950,000
• Shareholder’s Equity: $1,978,500
• Non-Controlling Interests: $171,500

And that’s it! Depending on your jurisdiction, you’ll also need to prepare necessary disclosures and attach them to the final consolidated balance sheet.

How do you read a consolidated balance sheet?

A consolidated balance sheet is read the same way as a standard balance sheet. One column will define the amounts registered on the sheet—such as specific assets or liabilities—while other columns will show the amounts themselves, usually in millions of dollars over a period of a few years. Here’s a portion of a balance sheet from Microsoft, from Q4 2022.

Notice how, in this portion specifically for cash and cash equivalents, each row represents a different kind of asset in this category. As you move down the table, you’ll find the overall total for this asset class. Note that, unlike some other balance sheet formats, Microsoft records previous years on an entirely new table instead of using more columns.

Best practices for creating a consolidated balance sheet

Preparing a consolidated balance sheet can be a time and resource-intensive process. You’ll want to do what you can to streamline this essential process as much as possible while maintaining accuracy. Here are some best practices for this.

Start early

One of the most common mistakes made with essential processes like consolidation is starting too late. It’s understandable; there’s already a lot to do in your day-to-day. But if you wait too long, an issue that would have been a speed bump with enough time to fix it becomes a roadblock. Give your team ample time to consolidate your balance sheet to avoid potential issues.

Automatisieren Sie, was Sie können

Too many finance teams are still using spreadsheets and manual processes for consolidation. While the time-tested spreadsheet is dependable, it’s far from the most effective method. Adopt and use dedicated consolidation platforms like Prophix One and you’ll fly through this process in a fraction of the time you would otherwise.

Work on your process year-round (instead of just at year’s end)

When you go through a recurring process like consolidating balance sheets, you’ll often notice inefficiencies and other issues. They may be logged and filed away for later, but rarely are they worked on until the next time you have to go through the process. Instead of waiting until the end of the fiscal year to do this, find ways to improve your process over time.

Create consolidated balance sheets with Prophix

While consolidation is an essential process, you should still be trying to spend as little time on it as possible while keeping your numbers accurate.

That's where Prophix One comes in.

Prophix One is a Financial Performance Platform that simplifies and transforms processes in the Office of the CFO– from budgeting and planning to financial consolidation and close.

Learn more about Prophix One Financial Consolidation in this short video.