A Complete Guide to Consolidated Financial Statements

In today’s corporate environment, businesses operate through complex structures that involve a parent company and multiple subsidiaries. To present a clear and unified financial picture between subsidiaries, these entities prepare consolidated financial statements especially in global financial hubs like Hong Kong. These statements are essential for stakeholders to assess the overall health and performance of the entire corporate group. In this blog, we will explore more details about consolidated financial statements, why it is important and how these statements are prepared. 

What Are Consolidated Financial Statements?

Financial consolidation means combining the assets, liabilities and other financial items of two or more entities into one consolidated entity. Consolidated financial statements are comprehensive financial reports that combine the financial information of a parent company and its subsidiaries. Even if the subsidiaries are separate legal entities from the parent company and have their own financial statement, they are included in the consolidated group financial statement. This consolidated approach ensures that stakeholders receive an accurate and transparent picture of the overall financial health of a corporate group rather than viewing each entity in isolation.

To understand the scope and necessity of the consolidated financial statements better, it is essential to compare with standalone financial reporting. 

• Standalone Financial Statements: Reports the financial position of a single entity. 
• Consolidated Financial Statements: Presents the overall financial health of a corporate group, eliminating intercompany transactions.

When Are Consolidated Financial Statements Required? 

According to Section 379 of the Hong Kong Companies Ordinance (CO), any company that controls one or more entities is required to prepare consolidated financial statements at the end of its financial year. However, some exemptions can be applied, such as if the company is a wholly-owned subsidiary of another body corporate during the financial year.

Why Are Consolidated Financial Statements Important?

Consolidated financial statements go beyond just meeting compliance. These statements help stakeholders to access group-wide performance metrics to identify high-performing subsidiaries, areas for cost reduction and strategic investment opportunities.They also ensure compliance with financial reporting regulations and standards, such as the Hong Kong Financial Reporting Standards (HKFRS) and International Financial Reporting Standards (IFRS). 

Who Uses Consolidated Financial Statements? 

• Internal Decision Makers: Internal decision makers such as CFOS, Company Directors and business analysts assess risks and performance of the company through these statements. 
• Lenders and Financial Institutions: Assess the company’s creditworthiness and risk profiles. 
• Investors and Auditors: To ensure compliance with financial reporting standards such as HKFRS or IFRS.

Components of Consolidated Financial Statements

1. Consolidated Statement of Financial Position (Assets, liabilities, equity) 

The Consolidated Statement of Financial Position provides an overview of a group’s financial health at a specific point in time. It combines the assets, liabilities, and equity of the parent company and its subsidiaries, eliminating intercompany transactions to present a unified view. This statement helps stakeholders assess the financial stability, liquidity, and overall net worth of the consolidated entity. Key elements are current and noncurrent assets, total liabilities, and shareholders’ equity, which indicate the group’s financial standing.

2. Consolidated Statement of Income (Revenue, Expenses, Net Profit) 

The Consolidated Statement of Income combines the revenue, expenses, and profits from all subsidiaries, ensuring that intercompany transactions are removed to prevent double counting. This statement provides investors and management with insights into profitability trends, operating efficiency, and financial sustainability. In addition, it includes other income such as foreign currency translation adjustments and unrealized gains or losses, which affect the group’s equity.

3. Consolidated Statement of Cash Flows (Operating, investing, financing activities)

The Consolidated Statement of Cash Flows tracks the inflow and outflow of cash within the group for operating, investing, and financing activities. This helps stakeholders understand how the business generates and utilizes cash across different entities with 

insights into liquidity and cash management strategies. This statement shows an accurate representation of the group’s net cash position. A strong cash flow position is critical for expansion, debt repayment, and maintaining financial stability.

4. Consolidated Statement of Changes in Equity

The Consolidated Statement tracks changes in equity such as share capital, retained earnings, and reserves, over a financial period. It reflects transactions such as dividend payments, issuance of shares, and changes due to revaluation or foreign currency translation adjustments. This statement is important for investors and financial analysts as it shows how shareholder value is evolving. By consolidating equity from the parent and subsidiaries, it provides a comprehensive view of ownership interests and non-controlling interests (NCI).

How to Prepare Consolidated Financial Statements

Preparing accurate consolidated financial statements is a step-by-step process to ensure all intra-group transactions are eliminated and only external-facing results remain. Here are the main steps involved: 

Step 1: Combine Financials of Parent and Subsidiaries

The first step in consolidation is combining the financial statements of the parent company and its subsidiaries. This is required to align accounting periods and policies to ensure consistency across all entities. If subsidiaries operate in different currencies, their financial data must be converted into the parent company’s reporting currency for accurate representation of financial performance.

Step 2: Eliminate Intercompany Transactions

To avoid double counting and misrepresentation, all intercompany transactions, including internal sales, receivables, and payables, must be removed. This ensures that only transactions with external parties are recorded in the consolidated financial statement showing the group’s actual revenue, expenses, and financial position.

Step 3: Account for Non-Controlling Interest (NCI)

When a parent company does not own 100% of a subsidiary, the portion of equity belonging to minority shareholders is recorded as Non-Controlling Interest (NCI). This ensures that financial statements accurately represent the ownership structure. NCI is shown separately within equity on the consolidated statement of financial position and also affects the allocation of net profits in the consolidated income statement.

Step 4: Translate Foreign Currency Transactions

For multinational corporations, financial data from overseas subsidiaries must be translated into the parent company’s reporting currency. This process follows the Hong Kong Financial Reporting Standards (HKFRS) and involves converting assets and liabilities at the period-end exchange rate, while revenue and expenses are translated at average rates. Proper currency translation is crucial to maintaining consistency and reducing distortions in financial reporting.

Step 5: Remove Investment in Subsidiaries

The parent company’s investment in subsidiaries is removed from the consolidated balance sheet and replaced with goodwill or adjusted against net assets. Goodwill arises when the acquisition price exceeds the fair value of net assets acquired and is subject to periodic impairment testing. This adjustment is to avoid double counting and ensures the consolidated financial statements reflect the true financial position of the corporate group.

Key Methods for Consolidation

There are different methods for consolidation depending on the level of control and influence. 

Full Consolidation Method (For majority-owned subsidiaries)

This method is used when the parent company has control over a subsidiary, typically through more than 50% ownership. All assets, liabilities, income, and expenses are consolidated, and non-controlling interests are recognized.

Equity Method (For associates and joint ventures)

This method is used when the parent has significant influence but not control, usually with 20% to 50% ownership. The investment is recorded at cost and adjusted for the investor’s share of the associate’s profits or losses.

Proportional Consolidation Method (For jointly controlled entities)

This method is used for jointly controlled entities, where the parent company’s share of each asset, liability, income, and expense is combined proportionally.

Hong Kong-Specific Regulatory Requirements

In Hong Kong, preparing consolidated financial statements have to follow the regulatory framework aligned with international standards. 

Companies Ordinance Section 379

A company that controls one or more entities must prepare consolidated financial statements unless:

• It is a wholly owned subsidiary of another company.
• It is a partially owned subsidiary, and proper notice is served under Section 379(3).

Exemptions from Consolidation

The eligible companies may avoid consolidation if:

• Revenue, assets, or employee count falls below thresholds (e.g., HK$100 million in revenue).
• 75% of members agree to exemption and no one votes against.

HKFRS and IFRS Compliance

Hong Kong Financial Reporting Standards (HKFRS) are fully in compliance with IFRS to ensure global consistency in consolidated financial statements.

Auditing Requirements

All Hong Kong-incorporated companies must have their financials audited by a Certified Public Accountant (CPA). Even companies under “reporting exemption” must submit to an audit.

Challenges in Financial Consolidation

Preparing consolidated financial statements can be challenging for the following reasons. 

• Complex Intercompany Transactions: Managing and eliminating numerous intercompany transactions to prevent inaccuracies.​
• Differences in Accounting Policies: Ensuring to align with the different accounting policies across subsidiaries for uniformity.​
• Regulatory Compliance: Keeping up with the changes in the financial reporting standards and regulations.

Benefits of Consolidated Financial Statements

Despite the challenges, preparing consolidated financial statements also has several advantages:​

• Unified Overview: Provide a comprehensive view of the corporate group’s financial health to the stakeholders in making informed decisions.​
• Strategic Insights: Able to identify strengths, weaknesses, opportunities, and threats across the whole corporate group. 
• Legal and Regulatory Compliance: Ensuring to be in compliance with statutory requirements to avoid the legal penalties risk. 

Timeline To Prepare Consolidated Financial Statements in Hong Kong

While there is no fixed statutory deadline to prepare consolidated financial statements, companies must ensure timely completion to comply with tax regulations, shareholder reporting, and audit requirements. 

• Listed Companies: Publicly listed companies in Hong Kong must submit their annual financial reports within 3 months after the financial year-end, as mandated by Hong Kong Stock Exchange (HKEX) Listing Rules. Delayed reporting can result in penalties and reputational risks.

• Private Companies: Although there is no statutory deadline, consolidated financial statements must be prepared in accordance with the Hong Kong Financial Reporting Standards (HKFRS) and made available for audit.

• Audit Submission: The consolidated financial statements should be finalized before statutory audits since auditors require accurate and completed financial records to issue an audit opinion.

• Annual General Meetings (AGMs): The audited financial statements along with the consolidated financial reports have to be presented during AGMs. According to the Companies Ordinance (Cap. 622), private companies must hold their AGM within 9 months after the financial year-end, while public companies must do so within 6 months.

The Role of Financial Consolidation Software

Technology plays a crucial role to prepare consolidated financial statements by automating data aggregation, eliminating intercompany transactions, and ensuring compliance with accounting standards. Especially in the context of Hong Kong, where businesses operate across multiple entities and jurisdictions, these tools enhance accuracy, efficiency, and transparency in financial reporting. By integrating accounting software like Xero with other third-party tools that are designed specifically for group reporting, consolidation can be simplified through multi-currency conversions, real-time reporting, and audit preparation to reduce manual errors and save time. 

Conclusion

Consolidated financial statements are a fundamental tool for businesses operating as a corporate group. These statements provide stakeholders with a clear and accurate representation of financial performance and position. Whether you are a growing business expanding into new markets or a mature holding company in Hong Kong, ensuring your consolidated financial statements are accurate and timely is critical for regulatory compliance and financial insight.

Consulting with a qualified audit firm can help streamline the process and ensure compliance with local regulations. FastLane Group understands the nuances of Hong Kong’s regulatory environment and provides expert assistance in preparing consolidated financial statements. Our team of CPAs and financial advisors ensures your business remains compliant with:

• Consolidation and audit services
• Tailored advice on exemption eligibility, and
• Technology-integrated financial reporting

Talk to our team today to simplify your group financial reporting.