The aim of consolidated financial statements is to present the equity and financial position of the group, as well as its operating results, as those of a single economic entity.
Since companies within the group are legally separate, however, there can be transactions between them that have repercussions on the accounting entries under SP and CE.
To provide a true and fair view of group operations involving third parties, all balances resulting from intragroup transactions need to be eliminated.
Once the scope of consolidation has been defined, the next step is to uniform some of the data on the financial statement. This can already be done when individual balance sheets are prepared for each company by making sure that the same accounting policies are used for like transactions and other events in similar circumstances.
Pre-consolidation procedures are a preliminary to the actual consolidation and can be subdivided into formal and substantive.
Art. 30 – D. Lgs 127/1991
If differently-dated parent and subsidiary financial statements are used for consolidation, the difference between the end of the reporting period of the subsidiary and that of the parent must be no more than three months.
If the period exceeds three months, then additional interim financial statements should be prepared.
Items on the balance sheet need to be uniform so appropriate adjustments need to be made where necessary (SP, CE and NI).
Formal pre-consolidation operations may include making sure the charts of accounts are uniform, for example when differences in type of business activities result in different headings being used for the accounts.
Preliminary operations for substantive consolidation may regard making sure evaluation criteria are uniform or neutralising effects of taxation (e.g. accelerated depreciation).
Reciprocal transactions between companies in the group have to be eliminated from intrinsic value to determine correct values to be entered on consolidated financial statement.
The consolidation process can be defined as:
1. elimination of reciprocal transactions:
2. elimination of intragroup profits and losses;
3. Elimination of cost of investment in each subsidiary and the portion of equity.
We use the example of Mediaset to illustrate preconsolidation procedures.
We use the example of Fiat to illustrate preconsolidation procedures.