Principles to keep in mind while preparing a Combined Financial Statement or Consolidated Financial Statement

How to prepare combined financial statement and consolidated financial statement

If you are an owner of multiple businesses or the majority shareholder of a Company which is part of a group and is under a parent / subsidiary relationship, it’s important to understand your options when it comes to preparation of financial statements and reporting for stakeholders. Being an owner of the Company / group, you need to know what the financial statements show about the financial health of your business and the subsidiary / associate companies. The more you know about financial statements, the more likely you’ll be an informed and discerning owner / shareholder of the business.

A Brief understanding of financial statements

Financial statements are reports that summarise important financial accounting information about your business. According to IAS 1 Presentation of Financial Statements, there are four main types of financial statements: the statement of financial position or ‘balance sheet’, the statement of comprehensive income or ‘income statement’, statement of changes in equity and statement of cash flow.
In layman terms, the financial statement is like a report card for a Company to measure its performance through the Statement of Comprehensive Income, and Statement of Financial Position is used to ascertain its Grade. The following Grades provide confidence to the stakeholders, who decide to what extent they have to rely on the entity.

Types of financial statements

Being an owner of multiple businesses, whether owning a Parent company or owning and holding control in various entities or groups of companies, it is required to prepare the financial statements of the entity to disclose their financial results. The commonly used financial statements are:

  1. Single entity financial statement;
  2. Consolidated financial statements; and
  3. Combined financial statements.

In this article, we will further explore the above, keeping the owners’ mindset in mind and will briefly provide an understanding of the meaning of all these financial statements, their purpose, and their usefulness.

a)Single Entity Financial Statements

Single Entity financial statements, or Standalone financial statements, represent the financial position and the performance of the company as a single entity without taking into account the financial position and the performance of its subsidiaries, etc. The financial statements of the entity are written records that convey the business activities and the financial performance of a company.

b)Consolidated Financial Statements

In a consolidated financial statement, the financial results of the subsidiaries are included in a single financial statement with the parent company, as if the parent company and the subsidiaries were one entity. While the subsidiaries operate separately from the parent company, a consolidated financial statement reports on the group, with the parent company and subsidiaries together making up the financial picture of the group.

As per the guidelines from International Financial Reporting Standards on Consolidated financial statements (FRS 10), a few key factors to keep in mind are that a consolidated financial statement must be prepared, rather than a combined financial statement, when the parent has:

  1. Power over (controlling rights) the subsidiary – rights that give the parent the ability to direct the relevant activities of the subsidiary;
  2. Exposure/rights to (variable) return – rights to returns that aren’t fixed and may vary based on the performance of the subsidiary; and
  3. Ability to use its power – to affect the amount of returns.

Keep in mind that there is additional application guidance in which assessment of control is difficult.

C)Combined Financial Statements

On the other end of the spectrum, combined financial statements are, simplistically, when two or more entities/segments report their finances in a combined document. Within the document, financial statements presenting the historical financial information of a circumscribed area of economic activities for which consolidated financial statements are not prepared in order to present the financial position of the combined economic activities, as well as their financial performance and cash flows.

Combined financial statements are prepared where a reporting objective exists for two or more legal entities who are all commonly owned or controlled by an individual or group of individuals who wanted to see the financial results for these subject entities as a single unit. Further, they do not by themselves meet the definition of a group under IFRS 10.

In many cases, it is not just entities that are included when preparing combined financial statements but also parts of entities. This can be the case when the parts of entities are sufficiently identifiable and, from a financial reporting perspective, separable from the entity which they are part of.

To prepare a combined financial statement, all entities/segments are under common control during the reporting period. Common control can be:

  1. A Common Control / Management Approach – A common person or entity or part(s) of entities may be combined, if they were under common control as per the respective reporting framework. This approach reflects the control principle currently allowed for the preparation of financial statements for economic activities, which were, for the respective reporting period, part of a larger group or commonly controlled by the same individual(s).
  2. A Common Ownership Approach – Entities or parts of entities may be combined if all combined entities or parts of entities were under common ownership. It can be a case where entities are jointly owned, but not commonly managed by the same management. It further allows the preparation of combined financial statements regardless of any changes in the Management structures and enables those preparing the statements to show the historical track record of economic activity for every period during which this economic activity is commonly managed.

A Comparison of Consolidated Financial Statements vs. Combined Financial Statements

#DescriptionKey features of Combined Financial StatementsKey features of Consolidated Financial Statements
1Ownership, relationship and its useCombined financial statements are used where the entities are under common control but do not have parent-subsidiary relationships. One of the examples which we can use here is, combined financial statements based on Investor Interest. In addition, combined financial statements, equity of the entities which are being combined (may or may not be subsidiaries) are added.Consolidated financial statements are presented where there is a parent-subsidiary relationship, which means one (parent) is owning and controlling the other company (subsidiary) by way of exercising control either by holding shares of the subsidiary or right to direct the profits towards the parent company.
2Accounting Treatment of Intercompany TransactionsAccounting treatment for combined financial statements eliminates intercompany transactions and balances, but rarely emphasises, the unrealized gain or loss on inventories or assets unless identical and material in value/nature.Accounting treatment of consolidated financial statements eliminates intercompany transactions. These are transactions that occur between the parent and subsidiary company. These transactions must be eliminated in order to avoid double-counting, once on the books of the subsidiary and again on the parent’s books. This avoids misrepresenting transactions that distort the actual results of the parent company and subsidiary.
3Similarities on the Income StatementBoth combined and consolidated financial statements add the subsidiary companies’ income and expenses to the parent company. This creates a total income and expenses for the entire group of companies, including the parent.
4Differences in the Reporting of Stockholders EquityIn combination, the equity for all the entities is totalled and presented accordingly, whereas in consolidation only the Parent share capital is disclosed, while the retained earnings are accumulated after necessary adjustments e.g. unrealized gain and loss and then split into parent and NCI portions.
Combined financial statements add the stockholder’s equity to that of the parent. This is because the parent has a controlling interest in the subsidiary group of companies.
Consolidated financial statements simply eliminate the stockholder’s equity section of the subsidiary. Therefore, there are no changes to shareholder equity accounts, such as stock and retained earnings.
5Non-controlling InterestIn Combined financial statements, there is no non-controlling interest separately shown and the financial results are combined based on common ownership and control.In consolidated financial statements, accountants must keep track of the non-controlling interest relationship between the parent and subsidiary. This creates an account called non-controlling interest or minority interest, which tracks the part of the subsidiary not owned by the parent.

Which type of Financial Statement to use?

When the parent has power over the subsidiary, rights to variable return from its involvement with a subsidiary, and the ability to use its power over a subsidiary to affect the amount of return, you must file a consolidated financial statement as per IFRS 10.

Whereas a combined statement can be prepared in the situation when two or more entities are under common control, but there is no actual parent company relationship that exists. The combined statement is much easier to prepare since it simply requires a set of separate financial statements for each entity.

It is more important to be able to assess each entity on its own merits instead of as part of the unified whole, then the combined financial statement may be more suitable.

As with much of the reporting that is done specific to a business, which is the end goal, Assessing the parent and subsidiaries as a whole vs. assessing the individual components—will help you determine which financial statement structure is better for presenting your financial information.

How can we help you professionally?

With our well-diversified professional services, we can support in the preparation of different types of financial statements according to the ownership structure and set financial reporting standards and can assist you in evaluating the relationship between different entities of the Group.

In case you have any questions regarding your reporting obligations for your organization, please contact us at or call us on +971 4 425 6616.

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