Consolidation in Accounting: How Consolidated Financial Statements Are Prepared

Key points at a glance

• Consolidation combines the separate financial statements of a group of companies into consolidated financial statements and presents them as a single economic entity.
• In Switzerland, the obligation to prepare consolidated financial statements is governed by the provisions of the Swiss Code of Obligations (Art. 963 et seq. CO).
• Proper consolidation includes harmonising the separate financial statements and eliminating intra-group transactions.
• Depending on the ownership structure, different consolidation methods such as full consolidation or the equity method are applied.
• A structured approach and standardised processes increase the quality of the consolidated financial statements and facilitate the audit.

What is consolidation in accounting?

Consolidation in accounting combines the separate financial statements of a group of companies into consolidated financial statements. The aim is to present the asset, financial and earnings position as if the group of companies were acting as one economic unit.

Corporate groups often consist of a parent company and several subsidiaries, each preparing its own annual financial statements. For owners, the board of directors, executive management, investors or lenders, however, this isolated view is not sufficient. What matters is how the group develops as a whole and how its economic situation is to be assessed overall.

Only the aggregation of the separate financial statements provides a complete picture of the group’s economic situation. On this basis, consolidated financial statements are created that transparently combine the financial information of the included companies. They form the basis for a reliable assessment of the group’s economic situation.

Why is consolidation necessary?

Consolidation prevents the economic situation of a group from being assessed solely on the basis of individual annual financial statements. This makes economic interrelationships visible that cannot be identified from the individual financial statements alone. It improves the decision-making basis for management, owners and other stakeholders.

Without consolidation, the separate financial statements would only reflect the financial situation of the respective company. The economic performance of the group of companies as a whole would, however, be presented incompletely. Consolidated financial statements close this information gap and increase transparency for owners, the board of directors, executive management, investors, lenders and other stakeholders.

“Consolidated financial statements should reflect the economic reality of a group of companies as accurately as possible. Consolidation creates the basis for transparent and meaningful financial reporting.” – Leif Roth, financial expert

Who has to prepare consolidated financial statements?

A group of companies must prepare consolidated financial statements if it is obliged to consolidate in accordance with the requirements of the Swiss Code of Obligations (Art. 963 et seq. CO). The decisive factor is whether a legal entity controls one or more companies and thereby forms an economic unit.

Whether consolidated financial statements have to be prepared depends on the legal requirements and the actual control relationship within the group of companies.

It is not only the number of companies that matters, but whether a control relationship exists between them. In practice, this particularly concerns parent companies that directly or indirectly control subsidiaries.

However, not every group of companies is required to prepare consolidated financial statements. Under Art. 963a CO, a legal entity may, among other things, be exempt from this obligation if, together with the controlled companies, it does not exceed two of the following thresholds in two consecutive financial years: CHF 20 million in total assets, CHF 40 million in sales revenue and 250 full-time positions on an annual average. Further exemptions and counter-exemptions must be assessed on a case-by-case basis.

Which criteria determine the consolidation requirement?

The obligation to prepare consolidated financial statements is based on various legal and economic criteria. The decisive factor is not just the ownership percentage but the actual control over another company.

The most important criteria include:

The assessment of the consolidation requirement is always carried out at the level of the entire group of companies. In particular, for ownership structures, international groups or changes in the scope of consolidation, a careful review of the legal and accounting requirements is recommended.

How does consolidation work?

Consolidation follows a clearly defined process in which the separate financial statements of all included companies are combined into consolidated financial statements. The objective is to eliminate intra-group relationships and present the group of companies as a single economic unit.

Regardless of company size, efficient consolidation starts with a uniform accounting basis. Ideally, recognition, measurement and booking principles are defined group-wide in advance so that the separate financial statements do not need to be laboriously harmonised only at the time of consolidation.

How are the separate financial statements prepared for consolidation?

An accounting manual defines group-wide how transactions are recorded, measured and presented for consolidation purposes. Especially for companies in different jurisdictions, it creates a common accounting basis and reduces subsequent reconciliations and adjustments.

This preparatory work is particularly worthwhile for smaller groups with foreign investments. It not only facilitates ongoing consolidation, but also speeds up data preparation when an interest is to be sold, for example as part of an M&A transaction.

Digital accounting solutions such as Bill Bucher by Auditrium can help implement uniform accounting processes operationally and provide the required financial data in a structured way.

Consolidation in 7 steps

Consolidation generally follows a standardised process:

Depending on the size and complexity of the group, individual steps may require more time and coordination. In particular, international group structures or differing accounting processes increase the coordination effort.

Which consolidation procedures are there?

Consolidation procedures ensure that the consolidated financial statements only reflect transactions with third parties. Intra-group investments as well as receivables, payables, income and expenses are eliminated or adjusted as part of the respective consolidation procedures.

• Capital consolidation: The parent company’s investment is offset against the subsidiary’s equity. This prevents investment values from being reported twice within the group.
• Debt consolidation: Receivables and payables between group companies are offset against each other. Only claims and obligations vis-à-vis third parties remain in the consolidated financial statements.
• Income and expense consolidation: Income and expenses from intra-group transactions must not affect the consolidated financial statements and are therefore eliminated.
• Elimination of unrealised profits: Profits from intra-group supplies or services may only be recognised when they have been realised with third parties.

Which consolidation procedures are required depends on the intra-group business relationships and the structure of the group of companies. In practice, they are often combined.

Which specific aspects need to be considered?

In addition to the actual consolidation procedures, further accounting issues must be taken into account in group consolidation. Depending on the company structure, these require additional calculations and the application of specific accounting rules.

The most important specific aspects include:

• Goodwill that may arise when acquiring a subsidiary.
• Non-controlling interests where subsidiaries are not wholly owned by the parent company.
• Foreign currency translation for international groups.
• Deferred taxes that may arise from consolidation entries.

These issues do not arise in every group of companies. However, when they become relevant, they should be carefully assessed as part of the consolidation and recognised in accordance with the applicable accounting rules.

Which consolidation methods are there?

The choice of consolidation method depends on the level of influence a company has over an investment. Depending on control or joint control, different methods are applied to appropriately reflect the economic conditions in the consolidated financial statements.

While controlled subsidiaries are generally fully consolidated, different accounting rules apply to joint ventures and associates. The method to be applied depends on the relevant accounting standards and the specific ownership structure.

Full consolidation

Controlled subsidiaries are generally fully consolidated. All assets, liabilities, income and expenses of the subsidiary are fully included in the consolidated financial statements.

Intra-group investments and transactions are then eliminated as part of the consolidation. If other owners retain interests in the subsidiary, these are reported separately as non-controlling interests.

Equity method

If there is only significant influence over a company, accounting is performed using the equity method. In the consolidated financial statements, the investment is initially recognised at cost and subsequently adjusted for the investor’s share of the investee’s profit or loss.

Unlike full consolidation, the assets, liabilities, income and expenses of the associate are not recognised individually in the consolidated financial statements. Instead, only the carrying amount of the investment changes in line with the company’s economic performance.

Proportionate consolidation

For jointly controlled entities, assets, liabilities, income and expenses were traditionally recognised in proportion to the ownership interest.

Under International Financial Reporting Standards (IFRS), joint ventures are generally accounted for using the equity method. Swiss GAAP FER 30, on the other hand, allows both proportionate consolidation and the equity method for joint arrangements. The method to be applied is therefore determined by the respective accounting standard.

Note: The consolidation methods determine how an investment is included in the consolidated financial statements. This is distinct from the consolidation procedures such as capital, debt, income and expense consolidation or the elimination of unrealised profits. These are applied – depending on the circumstances – within the chosen consolidation method.

Which challenges arise in consolidation?

Consolidation places high demands on the quality of financial data, the organisation of the closing process and technical expertise. The more complex the group of companies, the more important uniform standards and clearly defined processes become in order to prepare correct and traceable consolidated financial statements.

In practice, challenges often arise not from the consolidation entries themselves but already during the preparation of the separate financial statements. Different charts of accounts, diverging accounting policies or inconsistent data complicate the aggregation of financial information and increase the reconciliation effort.

The most common challenges include:

• Deviations from group policies: If uniform recognition and measurement principles are not consistently applied in individual companies, additional reconciliations and adjustments are required.
• Poor data quality: Incomplete or incorrect closing data result in additional review and correction work.
• Complex group structures: Multi-tier ownership, international entities or frequent changes in the group structure increase the complexity of consolidation.
• Time pressure in the closing process: Tight reporting deadlines require efficient collaboration among all group companies involved.
• Manual processes: Excel-based consolidations are prone to errors and make it difficult to trace adjustments.

Careful organisation of the closing process makes a significant contribution to overcoming these challenges. Uniform charts of accounts, standardised reporting packages and clearly defined responsibilities facilitate cooperation between group companies and reduce reconciliation effort.

To address these challenges, many groups now use digital consolidation solutions. They automate recurring tasks, improve the quality of closing data and support comprehensive documentation.

At the same time, software does not replace professional judgement: responsibility for proper consolidated financial statements remains with management and the responsible finance professionals.

Practical tip: The earlier consolidation processes are standardised, the more efficiently future closes can be completed. A uniform data basis pays off in the long term, especially for growing groups of companies.

Checklist: consolidation at a glance

Use the following checklist to verify that all key steps in group consolidation have been taken into account.

• Check the consolidation requirement.
• Define the applicable accounting standard.
• Fully determine the scope of consolidation.
• Harmonise recognition and measurement principles within the group of companies.
• Align charts of accounts and reporting dates.
• Translate foreign currency financial statements in accordance with applicable requirements.
• Determine the appropriate consolidation method for each investment.
• Carry out all required consolidation procedures in full.
• Recognise goodwill, non-controlling interests and deferred taxes where necessary.
• Document all consolidation entries in a transparent and traceable manner.
• Review the consolidated financial statements internally and prepare them for the audit.