Consolidated Financial Statements Explained
When a company controls one or more entities, we speak of a parent company and subsidiaries, also called a group.
A consolidated financial statement consolidates the financial records of the parent company and its subsidiaries. That results in a presentation of the group’s complete assets, liabilities, equity, income, expenses and cash flows as a single economic entity.
Consolidated financial statements provide a fair presentation when one of the companies of the group directly or indirectly has a controlling financial interest in the other companies.
Furthermore, it leads to more efficiency in the business’s finance records and creates a useful financial overview for business owners, shareholders, and creditors.
Do you need to produce consolidated financial statements?
According to Section 379 of the Companies Ordinance (CO), a company that controls one or more entities at the end of the financial year is required to prepare a consolidated financial report.
Some exemptions to preparing consolidated financial statements apply, as set out in section 379(3) of the CO:
- if the company is a wholly owned subsidiary of another body corporate in the financial year; or
- the company is a partially owned subsidiary of another body corporate in the financial year;
- at least 6 months before the end of the financial year, the directors notify the members in writing of the directors’ intention not to prepare consolidated statements for the financial year, and the notification does not relate to any other financial year; and
- as at a date falling 3 months before the end of the financial year, no member has responded to the notification by giving the directors a written request for the preparation of consolidated statements for the financial year.
However, even if you are exempted from having to provide statements, it is a good overview for yourself, the shareholders and directors.
The consolidated accounts will give a unified picture of your company’s finances, which is especially important if you operate in several countries with various accounting and tax laws.
How to prepare consolidated financial statements?
First of all, the balance sheets of the parent company and its subsidiaries should be combined. These include, among others, assets, liabilities, equity, income and cash flow.
If there are multiple currencies involved, these should be converted into the same presentation currency.
Next, the carrying amount on the parent company’s investment in the subsidiaries and the parent equity holdings in each subsidiary should be removed.
Lastly, extract intercompany assets, liabilities, and equity in the balance sheet, as well as expenses and transactional flows between entities in the group.
The consolidated financial statements should comply with sections 380, 381 and 383 of the CO. Furthermore, the accounting standards of the Hong Kong Financial Reporting Standards (HKFRS) should be applied. The HKFRS were converged with the International Financial Reporting Standards (IFRS) in 2005.
There is not a particular statutory deadline for preparing the consolidated financial statements unless they are required in order to fulfil other statutory deadlines such as tax filing, AGM, etc.
What about auditing?
Every year, Hong Kong incorporated companies must audit their financial statements by a registered Certified Public Accountant (CPA).
The auditor should be a separate CPA from the usual accountant or bookkeeper doing the company’s financial accounts.
As the CPA is separate and independent, an objective review can be made without internal bias and false reviews.
Below are the criteria for “Reporting Exemption” under the CO. They are not exempt of auditing. “Reporting Exemption” are exemptions to private or guarantee companies (there are exceptions) that are qualified to prepare simpler accounts and director reports.
- A small holding company that meets at least two of the following conditions in a financial year:
- Total revenue (or aggregate total revenue) shall not exceed HK$100 million
- Total assets (or aggregate total assets) shall not exceed HK$ 100 million
- Employees (or aggregate number of employees) shall not exceed 100
- A private company (or companies) that is no member of a corporate group should have a written unanimous agreement between the members.
- A small guarantee company (or holding of a group of small guarantee companies) not exceeding HK$ 25 million in a financial year.
- An eligible private company (or a holding of a group of eligible private companies) meeting the higher-size criteria and with 75% approval from members of the holding. company. Additionally, no member shall vote against the resolution.
- A holding company of a group of companies comprising one or more small private companies (or eligible private companies and one or more small guarantee companies provided that the holding company and its subsidiaries meet the prescribed size criteria) that has 75% approval from members of the holding company and no member votes against the resolution.
The group of companies may include non-Hong Kong body corporates.
When a company meets the exemption criteria, the exemption will run from the company’s financial year and every subsequent financial year until the company gets disqualified.
How HKWJ can help
As a business owner, you’d want accurate consolidated financial statements when presenting results to investors, shareholders, and directors.
Not only will this boost the company’s credibility, but it also helps to understand the financial state of the overall group.
If you need any help with accounting and/or consolidated financial statements, our professionals at HKWJ Tax Law are here for you.
We can create your consolidated financial statements, advice on exemption criteria and/or provide auditing services.
Reach out to us via the form below or call +852 2804 0889.
The HKWJ Group is a one-stop holistic service provider and advisor to help your business grow. Within the Group, HKWJ Tax Law assists with financial administration, such as payroll, bookkeeping and accounting, as well as tax and legal matters. At Triple Eight Ltd, we provide a wide range of professional and corporate services, such as company secretarial services, bank account opening and company incorporation.