consolidated & Standalone

Statements

By -
Sujit Tapkir
Suryanarayanan B
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Standalone Statements
 Standalone financial statements represent the financial
position and the performance of the company as a single
entity without taking into account the financial position
and the performance of its subsidiaries etc.
 Let us assume a case of a company (ABC Ltd) whose
primary business is to invest in other companies and this
company may not have any business operations of its
own apart from the investments done by it in other
companies (subsidiaries of ABC Ltd).
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Standalone Statements
 In such a situation, the standalone financials of ABC Ltd
would not show any significant financials except the
small amounts of dividend or interest income that it
might have earned from its subsidiaries.
 Even if the subsidiaries of ABC Ltd have hugely
profitable businesses, it will not be reflected in the
standalone financial performance of ABC Ltd.
 This is because the standalone financials include only the
business performance of only ABC Ltd while ignoring
the business performance of its subsidiaries.
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Standalone Statements
 An investor will be faced with the same constrained
situation when he/she analyses the standalone balance
sheet of ABC Ltd.
 The standalone balance sheet of ABC Ltd will show only
the debt taken by ABC Ltd without considering any debt,
which might have been taken by its subsidiaries.
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Standalone Statements
 If the subsidiaries have taken significant amount of debt,
then it will not be reflected in the standalone balance
sheet of ABC Ltd. Therefore, if an investor analyses only
the standalone financials of ABC Ltd, then he/she may
not come to know that the subsidiaries of ABC Ltd may
be under heavy debt burden.
 To overcome such situations of inadvertently missing out
on critical financial position and business performance,
investors analyse consolidated financials of the
companies.
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Consolidated Statements
 Consolidated financial statements of a company represent
the completed financial position and the business
performance of the company including its subsidiaries as
if they are single company.
 Consolidation is required when a corporation owns a
majority of another corporation’s outstanding common
stock.
 As a result, the consolidated financials of ABC Ltd will
include the sales done, profits made and the debt taken by
all the subsidiaries of ABC Ltd.
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Consolidated Statements
 The consolidated financials of ABC Ltd will show the
complete financial position of all the subsidiaries of ABC
Ltd whether these subsidiaries have taken a lot of debt or
have made a lot of investments, it will be reflected in the
consolidated financials.
 Similarly, the consolidated financials of ABC Ltd will
also show the complete business performance of all the
subsidiaries of ABC Ltd whether the subsidiaries have
made significant profits or significant loss, it will be
reflected in the consolidated financials.
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Benefits Of Consolidated
Statements
 Consolidated financial statements are presented primarily
for those parties having a long-run interest in the parent
company (parent’s shareholders or creditors).
 Consolidated financial statements often provide the only
means of obtaining a clear picture of the total resources
of the combined entity.
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Standalone vs Consolidated
Statements
 We believe that investors should always prefer the use of
consolidated financials in their stock analysis.
 This is because the consolidated financial statements
show the complete picture of the financial position and
business performance of any company.
 If the investor ignores consolidated financials and only
analyses standalone financials of any company, then
he/she may make erroneous decision as illustrated in the
following hypothetical example.
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Standalone vs Consolidated
Statements
 Let us assume that the company ABC Ltd only makes
investments in subsidiaries and it does not have any other
business operation of its own.
 The only income ABC Ltd shows in its profit and loss
statement (P&L) is the dividend income received by it
from its subsidiaries.
 Further, for illustration, let us assume that all the
subsidiaries of ABC Ltd are making huge losses.
However, somehow, these subsidiary companies are able
to survive by taking huge loans from banks etc. and are
using these loans to declare dividends for its shareholders
like ABC Ltd.
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Standalone vs Consolidated
Statements
 If in such a situation, while analysing ABC Ltd, an
investor considers only the standalone financials of ABC
Ltd.
 Then he will find that ABC Ltd has very little debt and is
showing profits due to the dividend received from its
investments in its subsidiaries.
 The investor will completely miss out the deep problems
existing in its subsidiaries, which will come to haunt ABC
Ltd in future.
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Standalone vs Consolidated
Statements
 However, if the investor analyses the consolidated
financials of ABC Ltd, then he/she would immediately
come to know that ABC Ltd (as a group including its
subsidiaries), is making huge losses and has a huge loan
to repay.
 The investor would immediately become aware of the
problems being faced by ABC Ltd.
 Therefore, after analysing consolidated financials of ABC
Ltd, the investor may take a better informed investment
decision.
Contents Key Definitions: Holding &
Subsidiary Companies
“Subsidiary Company” or “Subsidiary”, in relation to any
other company (holding company), means a company in
which the holding company—
(i) controls the composition of the Board of Directors or
(ii) exercises or controls more than one-half of the total
share capital either at its own or together with one or more
of its subsidiary companies.
“Holding company”, in relation to one or more other
companies, means a company of which such companies are
subsidiary companies
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