Consolidation in financial terms means the grouping of financial statements of two or more economic entities legally independent from each other.
It can also be defined as the financial statements that result from combining the financial statements of the parent companies and their subsidiaries. Below are several important concepts related to the consolidated financial statements.
Holding company:
It is a company that owns 25% or more of the common shares of another company, the holding company is also called the parent or principal.
Associated company:
It is a company of which the other company owns not less than 25% and not more than 50% of the outstanding common shares.
Subsidiary company:
It is that company whose majority of ordinary shares (more than 50%) is owned by another company, that is, they have the majority of shares with voting rights of a company.
Affiliate company:
They are those companies that without having significant investments among themselves, have common shares.
To determine the return generated by the investment in shares of subsidiary companies, the Mexican Institute of Public Accountants recognizes the equity accounting method.
Bulletin B-8 of the Accounting Principles Commission of the Mexican Institute of Public Accountants defines the consolidated financial statements:
“The consolidated financial statements are those that present the financial situation and results of operations of an entity made up of the holding company and its subsidiaries (regardless of their legal entities) and are formulated by substituting the investment in shares of companies that are subsidiaries of the asset holder. and liabilities of those and eliminating the balances and the operations carried out between the different companies, as well as the profits not realized by the entity ”.
Consolidation of financial information can be presented in two ways:
a) Vertical Consolidation:
When when consolidating, companies linked by staggered or complementary activities are grouped, such as companies dedicated to the generation of agricultural resources and their subsequent industrialization and commercialization.
b) Horizontal Consolidation:
When companies with similar activities are grouped together when consolidating, for example: self-service chains and department stores, when each is a legally independent entity.
Rules for the consolidation of the Statement of Financial Position:
1. As a general rule, all the subsidiaries of a holding company must be part of the consolidated financial statements.
2.- Consolidation must include all those subsidiaries that have control of shares with voting rights, even though the majority is that the majority of capital is held.
3. In the consolidation they will have to exclude concepts of receivable and payable between the companies that are consolidated.
4. Investments of the holding company in its main subsidiaries should be eliminated.
5. In cases where the holder does not own all the shares, the proportion of the minority or majority interest should be treated as a liability for consolidation purposes.
6. In order for the consolidated financial statements to present a financial position and results of operations, generally accepted accounting principles should be applied uniformly when the circumstances are similar.
7. The financial statements of the subsidiaries must be presented on the same date or with a difference not exceeding three months from the date of the consolidated financial statements.
It may be the case that the consolidation process one or more subsidiary companies, this may be due to the following exceptions:
a) Subsidiaries in foreign countries where there is exchange control and / or restrictions to remit profits to the parent or holding office:
b) Subsidiaries dedicated to activities different in nature from those carried out by the rest of the economic group.
The consolidated financial statements, even when presenting the financial situation of a group of companies, have important limitations that are mentioned below:
1. The individual financial situation of the holding company, as well as the individual financial situation of the holding company, as well as the financial situation of the subsidiary companies is not disclosed; reason why they can remain hidden, without knowing certain situations or contingencies that affect one or some of the companies.
2. The situation of the distributable profits is not reflected, as well as the distribution of funds, since this situation is determined by each company individually.
3. The return on investment or on individual assets of the company is not disclosed.
4. A non-uniform grouping of accounts may be presented in the concepts and values, since the financial information of the subsidiary companies is prepared under accounting standards and principles.
