When should you consolidate financials?

Accounting report regulations require the consolidation of the parent and subsidiary companies’ financial statements into one set of financial statements for the entire group of companies, regardless of whether the subsidiaries operate as separate legal entities. The subsidiary’s financials are reported on the parent’s statements in consolidated financials.

A multi-company business must consolidate when one company has a majority of the voting power in another company, with over 50% of the subsidiary’s outstanding common stock.

However, if the parent has minority ownership, it may still need consolidation accounting if the parent exerts significant influence over the subsidiary’s business decisions. Then consolidated financial statements must be prepared using the same accounting methods across the parent and subsidiary entities. These include the consolidated statement of income and the consolidated balance sheet.