Corporate Finance, 6th Edition

Chapter 6GETTING TO GRIPS WITH CONSOLIDATED ACCOUNTS

A group-building exercise

This chapter deals with the basic aspects of consolidation that should be understood by anyone interested in corporate finance.

An analysis of the accounting documents of each individual company belonging to a group does not serve as a very accurate or useful guide to the economic health of the whole group. The accounts of a company reflect the other companies that it controls only through the book value of its shareholdings (revalued or written down, where appropriate) and the size of the dividends that it receives.

The purpose of consolidated accounts is to present the financial situation of a group of companies as if they formed one single entity.

The goal of this chapter is to familiarise readers with the problems arising from consolidation. Consequently, we present an example-based guide to the main aspects of consolidation in order to facilitate analysis of consolidated accounts.

Section 6.1 CONSOLIDATION METHODS

Any firm that controls other companies exclusively should prepare consolidated accounts and a management report for the group.¹

Consolidated accounts must be certified by the statutory auditors and, together with the group's management report, made available to shareholders, debtholders and all other parties with a vested interest in the company.

Listed European companies have been required to use IFRS² accounting principles for their consolidated financial statements since ...