Translation: Consolidation = Financial Statement Consolidation

Financial Statement Consolidation (Consolidation) — also known as Consolidated Financial Statements — is an accounting process in which the assets, liabilities, equity, revenues, expenses, and cash flows of a parent company and all its subsidiaries are combined into a single comprehensive set of financial statements. It represents the financial performance and financial position of the entire group as one economic entity, while excluding and eliminating any commercial or financial transactions conducted between companies within the group.

Simplified definition: It is "combining the entire family’s finances into a single bank statement." Instead of looking at the father’s income and expenses (the parent company) separately from those of the children (the subsidiaries), everyone is combined to determine the family’s true overall wealth, while disregarding money the father gives his child as an allowance (because the money has not left the family).

Note: The fundamental difference between consolidated financial statements and standalone financial statements is that the latter present figures for the parent company alone (or the subsidiary alone) without including the performance of the group’s other entities, whereas consolidated statements provide a broader and more accurate picture of the group’s size and actual strength in the market.

Example: Suppose that the parent company (for example, SABIC) owns 100% of a subsidiary.

  • The parent company sold raw materials to the subsidiary for SAR 10 million.
  • The subsidiary generated revenue from external sales (to customers outside the group) of SAR 50 million.

Result: When preparing the consolidated financial statements, the SAR 10 million in revenue will be eliminated (because it is money that moved "from the right pocket to the left pocket" within the same entity). Only the SAR 50 million received from external parties will be recorded as the group’s actual consolidated revenue.

What does this mean for you?

  • The overall performance picture: It helps you as an investor assess the company’s true strength. Some parent companies may not generate strong operating profits on their own, but may achieve substantial profits through their subsidiaries.
  • Transparency and prevention of manipulation: It prevents companies from concealing losses or debts by transferring them to subsidiaries, as consolidation exposes hidden liabilities and shows the group’s actual financial position.
  • Accurate calculation of financial ratios: Key indicators such as the price-to-earnings ratio (PE Ratio) and return on equity (ROE) are calculated based on consolidated profits to determine the actual return on your investment.

Frequently asked question: If the parent company owns only 60% of the subsidiary (rather than 100%), are all of the subsidiary’s figures included in the consolidated statements?

Answer: Yes. As long as the parent company has "control" (usually meaning ownership of more than 50% of the voting rights), it consolidates 100% of the subsidiary’s assets, revenues, and expenses in its consolidated statements. However, to ensure fairness and clarify the rights of others, an item called "minority interests" or "non-controlling interests" is presented in the balance sheet and income statement to represent the 40% share owned by other investors in the subsidiary’s profits and assets.