At the end of every reporting period, accounting teams at companies with multiple subsidiaries face an unavoidable challenge: consolidating all the individual financial statements into a single, accurate picture of the overall company’s performance. This process, with its web of intercompany eliminations and regulatory inconsistencies, can often be the tipping point between meeting or missing reporting deadlines. Further, consolidation errors can lead to other serious problems, such as misstated earnings, regulatory penalties, and damaged investor confidence. This article examines the essential components of consolidation in accounting and the technical steps required to produce reliable, timely, unified financial statements.

What Is Consolidation in Accounting?

Consolidation in accounting is the process of aggregating the financial statements of a parent company and its subsidiaries into a single, integrated set of financial statements. The end result of this process—consolidated financial statements—presents the financial position, results of operations, and cash flows of the entire group, as if it were a single economic entity.

A parent company is a business that controls one or more subsidiaries, mostly through ownership of more than 50% of voting shares or other means of control. Subsidiaries are separate legal entities, with their own financial statements, which is one of the key differences from a division. Consolidation allows internal and external stakeholders to analyze one set of financial statements that have been carefully prepared using consistent methods, rather than reviewing multiple separate financial statements. The consolidated statements typically include a balance sheet, income statement, cash flow statement, and statement of changes in equity that reflect the activities of all entities under the parent company’s control.

Key Takeaways

  • Consolidation in accounting combines financial statements of parent companies and subsidiaries into a single set of documents representing the entire group.
  • Consolidation becomes necessary when one entity controls another, but what constitutes control is defined differently under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
  • Three consolidation methods can be applied, depending on the level of ownership and influence.
  • Challenges include standardizing accounting policies, eliminating intercompany transactions, converting foreign currencies, and reflecting noncontrolling interests (NCIs).
  • Using an eight-step consolidation process and the right software accelerates the accounting close cycle and increases accuracy.

Consolidation in Accounting Explained

Consolidation in accounting serves several purposes for businesses with complex ownership structures. It provides transparency for investors and lenders; it complies with regulatory reporting standards; and, most important, it delivers accurate operating information that is free of potential distortion from partial ownership interests, acquisition-related adjustments, multicurrency activities, and intercompany transactions that can obscure true results. The consolidation process itself involves several core components that convert individual entity statements into meaningful consolidated reports:

  • Standardized accounting policies: All entities within the group must align depreciation methods, revenue recognition practices, and inventory valuation approaches across subsidiaries to create comparable financial data. It may also entail adjusting reporting periods so they match in cases where subsidiaries operate with different fiscal year-ends.
  • Consolidated financial statements: Once the individual financial statements from the parent and subsidiaries are set, they’re combined line by line, adding assets, liabilities, equity, income, and expenses to create consolidated reports. In addition, adjustments are calculated, such as reflecting the portion of equity and earnings belonging to minority shareholders in subsidiaries that aren’t wholly owned.
  • Multicurrency conversions: For groups operating internationally, foreign subsidiary statements must be translated into the parent company’s reporting currency. This involves using appropriate exchange rates for each report, as well as varying approaches that depend on whether the company is following GAAP or IFRS. Consolidation software automates these calculations.
  • Elimination of intercompany transactions: Any transactions that occur between group entities, such as sales, loans, dividends, and cost allocations, must be identified and eliminated to prevent double-counting. These adjustments make sure that the financial statements reflect only the group’s external economic activity. Advanced accounting systems flag intercompany transactions throughout the period, significantly reducing the manual effort required for elimination entries.

When Is Consolidation Necessary?

Consolidation is necessary under both GAAP and IFRS when preparing general-purpose financial statements for entities with controlling interests. This requirement applies regardless of the size of the subsidiary or whether it operates in a different industry from the parent. There are only a few exceptions to the rule, mostly relating to scenarios of temporary control or long-term legal restrictions over access to the subsidiary’s resources.

Control exists when the parent has the power to direct the financial and operating policies of another entity to obtain economic benefit from its activities. The most common indicator of control is ownership of more than 50% of the voting rights in another entity. However, voting rights control can also exist through other arrangements, even if ownership is below 50%, including:

  • The power to govern the financial and operating policies under a statute or agreement
  • The ability to appoint or remove the majority of the board of directors
  • The power to cast the majority of votes at board meetings
  • Holding potential voting rights that are currently exercisable

The Rules of Consolidation in Accounting

Various consolidation rules apply, depending on whether a company follows GAAP or IFRS. The two have a lot in common, but where they differ is in style and terminology. Most critically, both sets of standards rely on control as the basis for when one entity should present the financial results of another as if they were one company. Both also cover many of the same fundamental issues regarding cross-group activity and other owner interests, and they both set disclosure requirements and carve out similar exceptions.

At the highest level, their distinctions come down to approach and language. For example, GAAP tends to have a specific rulebook for different situations, while IFRS imparts an overarching principle to be applied with judgment. Significant diverging terminology conventions include GAAP’s consistent use of “parent” and “subsidiary,” while IFRS often intermingles those terms with “investor” and “investee.” GAAP refers to “intercompany transactions,” whereas IFRS uses the term “intragroup.” And GAAP focuses on “primary beneficiary” in variable interest structures, while IFRS talks about “power over relevant activities.” Beyond these subtle distinctions are the specific rules for accounting consolidation under GAAP and IFRS.

GAAP

The primary guidance for consolidation under US GAAP is ASC 810, “Consolidation.” A key part of this standard is providing two models for determining control. The first is the voting interest model, which is the straightforward approach of a parent company holding majority voting rights or equivalent authority. The second is the variable interest entity (VIE) model, which applies when control exists through contractual or economic arrangements, rather than ownership of voting shares. The VIE model uses a two-step analysis: first, determining whether an entity qualifies as a VIE, based on its governance and equity structure and levels; and second, identifying the primary beneficiary, which is the party that both directs the VIE’s most significant activities and absorbs the majority of its risks or benefits. This dual approach guarantees that reporting reflects the economic reality of control, rather than just its legal form.

ASC 810 also establishes the detailed requirements for presenting consolidated financial statements. It provides instructions for how to eliminate intercompany transactions, account for NCIs, and determine when deconsolidation is warranted. The standard also mandates continual reassessment of control in situations involving VIEs, related-party arrangements, or any significant changes in ownership. Furthermore, ASC 810 specifies scope exceptions for certain types of entities where consolidation isn’t appropriate, such as for employee benefit plans and some investment companies. Extensive disclosure requirements are included to help users of financial statements better understand the nature of the reporting entity’s results, along with associated risks and obligations.

Other noteworthy GAAP consolidation standards to be aware of are ASC 805 and assorted SEC regulations. ASC 805, “Business Combinations,” sets the rules for consolidating newly acquired subsidiaries, including how to recognize acquired assets and liabilities and how to measure and account for goodwill. SEC regulations, including Regulation S-X, layer on additional requirements for public companies, such as separate financial statements for certain subsidiaries and pro forma disclosures.

IFRS

IFRS 10, “Consolidated Financial Statements,” provides a unified framework for consolidation based on the principle of control. Unlike GAAP, IFRS 10 applies a single control filter to all entities, regardless of their structure. Control exists when an investor has three elements: power over the investee, exposure or rights to variable returns from involvement with the investee, and the ability to use that power to affect the amount of their returns. This approach emphasizes substance over form, requiring judgment about whether these elements exist, based on all relevant facts and circumstances, including, but not limited to, voting rights, contractual arrangements, and the parent’s practical ability to direct relevant activities.

As a result, IFRS 10 addresses several nuanced control scenarios. For example, it recognizes de facto control—where a parent holds less than 50% of voting rights but still controls an investee because other shareholdings are widely dispersed, or where past voting history shows a pattern of the parent directing significant activities unilaterally. The framework also distinguishes between substantive rights that should factor into control assessments, such as the power to approve budgets, and protective rights that merely safeguard investor interests, such as the ability to veto dilutive ownership changes, and shouldn’t be factored in.

Beyond defining control, IFRS 10 lays out the mechanics of preparing consolidated financial statements. It describes the combination of financial statement line items, elimination of intragroup transactions, and options for valuation of NCIs, and provides instructions to account for changes in ownership interests—both with and without loss of control. The standard mandates the use of uniform accounting policies by the group and addresses practical issues, such as differing reporting dates among entities. Notably, IFRS 10 includes an exception for investment entities, rather than consolidating them.

Other IFRS standards work alongside IFRS 10. For instance, IFRS 3, “Business Combinations,” establishes the acquisition method for consolidating newly acquired subsidiaries, including recording of identifiable assets and liabilities at fair value, reflecting NCIs, and accounting for goodwill. IFRS 12, “Disclosure of Interests in Other Entities,” sets disclosure requirements for consolidated and unconsolidated entities, joint arrangements, and other associations. These disclosures help users understand the composition of the group, as well as the risks and their potential financial effects. IAS 27 covers separate financial statement needs, and IAS 28, which deals with accounting for joint ventures and associates, clarifies the boundaries for consolidation of subsidiaries.

The Three Types of Consolidation in Accounting

Accountants use three main approaches to consolidation, depending on the degree of control or influence one company has over another. Each method is meant to best represent the true nature of the relationship and affects how results appear in financial statements.

Equity Consolidation

The equity method of accounting consolidation—more casually known as equity consolidation—is used when an investor has significant influence, but not full control of, another entity, typically through ownership of 20% to 50% of voting rights. Under this method, the investor initially records the investment in the long-term asset section of its balance sheet at cost. Subsequently, the investor adjusts the asset’s balance for each period to reflect its share of the investee’s profits (or losses), with a corresponding amount recognized as investment income (or loss) on the income statement. Dividends received from the investee don’t count as income; instead, they reduce the investment’s carrying value since they represent a return of the investment, rather than earnings on it. This single-line presentation on both the balance sheet and income statement, instead of a line-by-line integration, reflects that while the investor can influence the investee’s financial and operating decisions, it doesn’t control them.

Equity consolidation is used by both GAAP and IFRS, but with several distinctions. One is that IFRS considers potential voting rights, such as options, when assessing whether significant influence exists, but GAAP doesn’t. Another difference is that GAAP lets companies choose to value their investments at fair value, recording any changes as gains or losses on their income statement. IFRS is more restrictive, mandating that companies must use the equity method, and only rarely can they use market values instead. Further, GAAP generally stops recognizing an investee’s losses once the investor’s carrying amount is reduced to zero, unless it has guaranteed additional support. Under IFRS, the investor must continue recording losses if it has other financial interests in the investee, such as preference shares (preferred stock) or loans as part of its overall investment.

Full Consolidation

Full consolidation is the most common type of accounting consolidation. It applies when a parent company has control over a subsidiary, either when ownership exceeds 50% of voting rights or when other arrangements give the parent power to direct key operating and financial decisions. With this method, the parent combines the subsidiary’s balance sheet, income statement, and cash flows, line by line, with its own, creating a single set of consolidated financial statements. Full consolidation includes 100% of the subsidiary’s balances, even if the parent owns less than 100%, with NCIs representing minority shareholders’ claims on the group’s net assets and earnings. Consolidating adjustments are made to these aggregated balances, including eliminating all intercompany sales, loans, dividends, and balances to avoid double-counting. The resulting consolidated financial statements reflect the entire group as one, rather than as separate legal entities.

Both GAAP and IFRS require full consolidation when control exists, but they differ in how control is assessed. This can lead to different consolidation outcomes in sophisticated structures. In full consolidation, NCIs are reported in the equity section on the consolidated company’s balance sheet. NCI shares of the subsidiary’s profits or losses are separately presented on the consolidated income statement, showing how much of the group’s earnings belong to outside shareholders. However, the measurement of NCIs differs between GAAP and IFRS. For example, GAAP uses fair value, but IFRS allows a policy choice at the time of each business combination—either fair value or the proportionate share of identifiable net assets. When control changes, both standards call for deconsolidation.

Proportionate Consolidation

Proportionate consolidation is now largely discontinued under current accounting standards. When it was used, it applied to joint ventures where two or more parties shared control and made decisions unanimously. GAAP has long prohibited proportionate consolidation for joint ventures, mandating the equity method instead. Effective as of 2013, IFRS 11 eliminated proportionate consolidation for joint ventures as well, also requiring the equity method. The only remaining use of proportionate consolidation under IFRS is for joint operations (as opposed to joint ventures), where parties have rights to specific assets or obligations for specific liabilities. In these limited cases, each party recognizes its share of assets, liabilities, revenue, and expenses, based on its contractual rights and obligations rather than ownership percentage.

The Consolidation Process

Consolidation happens in the final stages of the monthly accounting close process. This multistep process requires careful orchestration—subsidiary books must be closed first, consolidation adjustments calculated, local compliance requirements met—and then the parent can begin consolidating. The efficiency of the consolidation process is often a determining factor for whether companies complete their financial close on time, as delays at any subsidiary can push back the entire close. For this reason, it’s common practice for CFOs to build their close calendars backward from reporting deadlines, allowing buffer time for the inevitable reconciliation issues and last-minute adjustments that arise when combining multi-entity results.

To manage this complexity and compress timelines, consolidation accounting software has automated the routine tasks that once required days of manual effort. These systems process volumes of transactions in multiple currencies and time zones, automatically creating journal entries, and generating consolidated reports. Equally important to the consolidation process is the concept of materiality, which helps businesses prioritize their consolidation efforts. Applying this key accounting principle means that not every small investment or minor intercompany transaction requires the same level of scrutiny. Establishing appropriate materiality thresholds helps concentrate resources on areas that could significantly impact the consolidated financial statements and minimizes efforts on immaterial items.

With these issues in mind, the following eight steps reflect the tasks and subtasks involved in the accounting consolidation process.

  1. Determine Which Entities Need to Be Consolidated

    Prior to each reporting cycle, companies must verify their consolidation scope by reviewing the entire group structure. This assessment goes beyond simply double-checking ownership percentages—it requires analyzing all forms of explicit and implicit control. If consolidating entities where control isn’t obvious, companies should document their thinking, particularly for investments stipulating 40% to 60% ownership in which other factors might override voting percentages. Changes in control since the previous reporting period, such as acquisitions or disposals, should also be documented and reflected in the consolidation system. This step involves confirming whether any scope exceptions still apply, such as those for employee benefits plans or assets held for sale.

  2. Gather Supporting Documents and Statements

    Efficient data collection is the foundation of accurate consolidation. Companies need complete financial statements from each entity being consolidated, including detailed trial balances that provide account-level information. In addition to the core documents, accountants should gather:

    • Schedules of intercompany transactions
    • Supporting documentation for significant or unusual items
    • Details of any subsidiary adjustments made for local statutory reporting
    • Appropriate exchange rates for international translation

    Standardized reporting packages and automated data feeds facilitate collection efforts and decrease the risk of manual errors or omissions.

  3. Match Up Accounting Policies and Reporting Periods

    In order to produce comparable consolidated data, all entities within the consolidated group must follow consistent accounting policies. Aligning accounting policies normally includes standardizing depreciation methods, inventory valuation approaches, revenue recognition practices, and any other significant accounting treatments for all subsidiaries. For international operations, this step involves translating foreign subsidiary statements into the parent company’s reporting currency using appropriate exchange rates—spot rates for the balance sheet and average rates for the period covered on the income statement or cash flow statement. Companies must also match up reporting periods when subsidiaries operate on different fiscal calendars, either by preparing interim statements or making appropriate accruals. Any fair value adjustments from acquisitions need to be consistently applied to all affected periods.

  4. Eliminate Intercompany Transactions

    This step begins with analyzing all transactions among group entities included in the schedule of intercompany transactions, such as sales and purchases, management fees, royalties, dividends, and interest on intercompany loans. Then, verify that both sides of each transaction are recorded at identical amounts, investigating and resolving any differences before elimination. Accurate elimination of intercompany activity prevents the overstatement of group results. Elimination entries reverse these internal transactions, removing intercompany revenue and expenses from the income statement and intercompany receivables and payables from the balance sheet. For inventory transfers between group entities, companies must also eliminate any unrealized profit, adjusting both inventory values and cost of goods sold to reflect only the original cost to the group.

  5. Group Like Items Together

    After eliminating intercompany transactions, businesses combine the remaining balances from all group entities by adding together similar line items. This necessitates consistent account definitions and classifications in order to avoid situations where, for example, one subsidiary uses the term “administrative expenses” while another refers to “general expenses.” This step also includes precise mapping of accounts so companies can combine cash with cash, inventory with inventory, and revenue with revenue, while maintaining sufficient detail for required disclosures. Additionally, reclassifying items may be necessary to conform to the parent company’s presentation format. For example, if the parent presents depreciation separately on the income statement but a subsidiary includes it within operating expenses, reclassification keeps presentation consistent across consolidated statements.

  6. Identify Noncontrolling Interests (NCIs)

    Companies must calculate and present minority shareholder ownership for subsidiaries that aren’t wholly owned. To do so, they should determine the ownership percentages held by NCIs, then compute their share of the subsidiary’s net assets and current period income (or loss). The NCIs appear in the equity section of the consolidated balance sheet, separate from the parent’s equity. The consolidated income statement must clearly delineate the net income of the parent versus the NCIs. If a parent’s ownership percentage changes during the period, the NCI calculation becomes more complex, requiring a weighted average approach or separate calculations for different ownership periods.

  7. Record Any Goodwill and Adjust for Fair Value Difference

    Since subsidiaries are often acquired, acquisition accounting is a part of the consolidation process. Two examples are goodwill and fair value adjustments. Fair value adjustments reflect the difference between the book value of the subsidiary’s assets and liabilities and their fair values as of the acquisition date or when control was obtained. They tend to relate to property, plant, and equipment and inventory. Once these adjustments are made, goodwill can be calculated, representing the excess of purchase price over the fair value of identifiable net assets acquired.

    After initial recording, the parent recognizes the ongoing impact of these adjustments by depreciating or amortizing the assets based on their fair values, rather than on their historical book values. Goodwill isn’t amortized, but it must be tested annually for impairment or anytime certain triggering events occur, and written down, if necessary. These adjustments exist only at the consolidated level, but they carry significant implications for both financial reporting and tax planning.

  8. Assemble Consolidated Financial Statements

    The final step assembles all the adjusted data into formal consolidated financial statements, ready for internal review and external reporting. This process involves several tasks:

    • Compile the combined and adjusted balances into properly formatted financial statements.
    • Verify compliance with applicable presentation requirements under GAAP or IFRS.
    • Prepare the consolidated balance sheet with appropriate classification of assets, liabilities, and equity, including NCIs.
    • Create the consolidated income statement showing the allocation of net income between parent and NCI.
    • Generate a consolidated cash flow statement.
    • Develop the statement of changes in equity, reflecting all ownership changes and comprehensive income.
    • Draft required footnote disclosures about consolidation policies, significant subsidiaries, and material eliminations.

    Many companies integrate this final assembly with their broader financial consolidation and close process, using automated reporting tools to generate statements that flow directly into management reporting packages, regulatory filings, and external financial statements.

How Accounting Software Can Help Consolidation

NetSuite ERP’s financial consolidation capabilities address the specific challenges that can make consolidation one of the most time-intensive parts of the financial close. For companies managing multiple subsidiaries in different countries, the software automates complex multicurrency translations, instantly converting transactions from local currencies to the corporate reporting currency at configured exchange. The system’s automated intercompany elimination feature directly tackles one of consolidation’s most tedious and error-prone steps. NetSuite automatically flags and matches internal sales, cost transfers, and intercompany balances and creates the necessary elimination entries. This significantly reduces reconciliation time, accelerates the consolidation process, and lowers the risk of overstating results.

But perhaps most valuable for multinational businesses is NetSuite’s ability to maintain parallel accounting books that satisfy different reporting requirements simultaneously. Companies can manage GAAP, IFRS, and country-specific standards within a single system, so statements don't have to be manually adjusted for different rules. Combined with local tax codes, this feature helps subsidiaries meet their local requirements and maintain readiness for group consolidation, minimizing the potential to delay the consolidated close.

Consolidation in accounting is the process of reporting the combined financial position of corporate groups. Whether following GAAP or IFRS, companies must navigate complex requirements pertaining to control assessment, intercompany eliminations, multiple currencies, acquisition accounting, and NCIs. An efficient consolidation process leverages appropriate technology so businesses can meet their reporting obligations to internal and external stakeholders.

Award-winning
expense
management
software

Free Product Tour

Consolidation in Accounting FAQs

What is the role of a consolidation accountant?

A consolidation accountant prepares combined financial statements for corporate groups, making sure that all subsidiaries’ results are properly integrated. They manage intercompany eliminations, currency conversions, and compliance with multiple accounting standards. They also coordinate with various entities to gather financial data and resolve discrepancies.

Is consolidation in accounting difficult?

Consolidation becomes more difficult as the number of subsidiaries increases and for businesses with international operations or multiple ownership structures. However, specialized software and standardized consolidation processes can significantly tame the complexity.

Why is consolidation in accounting important?

Consolidation gives stakeholders a complete view of a corporate group’s financial health rather than fragmented individual entity results. It adheres to regulatory compliance and prevents misleading financial reporting that could result from viewing entities in isolation. Without proper consolidation, investors and creditors can’t accurately assess a company’s true financial position or performance.

Who uses consolidated financial statements?

Consolidated financial statements are used by investors to evaluate and monitor portfolio performance. Lenders use them to assess creditworthiness and covenant compliance across entire corporate groups. Regulators, analysts, and company management also depend on consolidated financials for oversight, valuation, analysis, and strategic decision-making.