A group-building exercise
The purpose of consolidated accounts is to present the financial situation of a group of companies as if they formed one single entity. 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 problemsarising from consolidation. Consequently, we present an example-based guide to the main aspects of consolidation in order to facilitate analysis of consolidated accounts.
In some cases, consolidated accounts take some time to come out or evendo not exist.1 Thatsaid, for various reasons, financial analysis may need to know some of the key consolidatedfigures, such as earnings and shareholders' equity, albeit only approximately.
The aggregation of accounts may give analysis this overview providedthat they roughly apply the various preconsolidation adjustments ...