Accounting Consolidation -- 24922

Accounting Consolidation

The purpose of the consolidation routine is to enable the issuance of consolidated financial statements.

Consolidated financial statements represent the integration of the financial statements of two or more companies with distinct legal entities, and their purpose is to present to partners or shareholders, creditors, and, other interested parties the financial position and the results of the operations of the parent company and its subsidiaries as if these companies were a single company with one or more branches, departments, or divisions.
 
Consolidation covers all the companies that make up the business entity, i.e. the parent company and its subsidiaries. However, when there is great diversity between the operational characteristics of each of the companies that make up the group (industry and financial institution, for example), it is common to exclude companies from different lines of business from consolidation. But the existing operational interrelationships must be examined so that undue exclusions are avoided.
 
The consolidated financial statements normally comprise the consolidated balance sheet, the consolidated statement of income for the year, and the consolidated statement of changes in financial position, which must be complemented by explanatory notes and other analytical tables necessary to clarify the financial and equity situation, as well as the consolidated results. The consolidated statement of changes in equity is usually not prepared, since this statement would be identical to the one presented by the parent company, because, by applying the equity method, the results of the controlled companies are integrated into the parent company's results and, consequently, also in its net equity.  However, it is important to note that, in special cases, consolidation adjustments can result in changes in the amount of net equity and the result of the parent company. In these cases, explanations about the nature and amount of consolidation adjustments that have had an effect on the consolidated net equity and the consolidated result should be disclosed in an explanatory note to the consolidated financial statements.

Equity
 
This method of valuing investments is called the equity method because it is based on the equity value of the investee-controlled or affiliated company.
 
The equity method is based on the foundation that the results and any variations that occur in an associated or controlled company must be recognized (accounted for) by the parent or investor company at the time they occur, regardless of whether or not they are distributed by the companies where they were generated. In this way, accounting by the equity method follows the economic fact, which is the generation of the result, and no longer its formalization by the distribution of such result. In view of the criteria established by the corporate legislation, whenever the investments made in controlled and associated companies are relevant, the equity method will be adopted.