IFRS Consolidation: How Several Companies Become One Set of Financial Statements

Why a group needs consolidated financial statements

While group companies report separately, it is impossible to assess the business as a whole: sales between the group's own entities inflate revenue, and intercompany loans distort the debt burden.

Consolidated financial statements are needed above all by external users: banks, investors, transaction counterparties. But they are also useful to the owner: only at group level can you see which segment really makes money.

There is also a practical reason: as soon as the group seeks external financing or prepares for a transaction, consolidated financial statements become a precondition for the conversation. Putting them together in a hurry, after the fact, always costs more than setting up the procedure in advance.

Defining the perimeter: who is in the group

The first step of IFRS consolidation is to establish which companies must be included. The key criterion is not the ownership share as such, but control: the ability to direct significant decisions and to receive variable returns from involvement.

Because of this, the perimeter does not always match the intuitive idea of the group. A company with a formally small stake may turn out to be controlled, while joint arrangements are accounted for differently from subsidiaries.

• subsidiaries under control
• joint ventures and joint operations
• associates over which there is significant influence
• special purpose entities set up for a specific task

Uniform accounting policies as a precondition for consolidation

Group companies often account differently: approaches to revenue recognition, inventory valuation and useful lives of assets vary. Such data cannot be added up directly.

So before consolidation, each company's financial statements are aligned with the group's uniform accounting policies, as well as with a single reporting date and a single presentation currency. This is the most labour-intensive part of the work, especially in the first year.

It is useful to set out the uniform policy in writing and communicate it to the accounting teams of all group companies. Otherwise alignment is redone at each consolidation, and the result depends on who did it.

Elimination of intragroup transactions

The essence of IFRS consolidation is to remove everything the group did with itself. Intercompany sales, internal loans and interest on them, dividends within the group, and matching receivables and payables are eliminated in full.

Unrealised profit in inventories needs separate attention: if goods were sold within the group and remain in another company's warehouse, the margin included in them has not yet been earned from the outside world and must be eliminated.

• intercompany sales and the related cost of sales
• intragroup receivables and payables
• loans within the group and interest accrued on them
• dividends paid between group companies
• unrealised profit in closing inventories and assets

Goodwill and non-controlling interests

When a company is acquired, the transaction price is compared with the fair value of the net assets acquired. The difference forms goodwill, which is then regularly tested for impairment.

If the parent does not own all of a subsidiary, part of its equity and results belongs to other participants and is presented as a non-controlling interest. These calculations are often a source of discrepancies in the first consolidation.

Typical consolidation mistakes

Most problems arise not from methodology but from data: group companies close the period at different times, intragroup balances do not match in amount, and currencies are translated at arbitrary rates.

The second group of mistakes is organisational. Consolidation is done manually in spreadsheets without a documented procedure, and when an employee leaves, nobody can reproduce last year's calculation.

The third group of problems relates to timing. If group companies close the period unevenly, consolidation starts by waiting for the last participant, and no time is left for the methodology itself.

• mismatched intragroup balances between companies
• different accounting policies aligned only formally
• incorrect translation of items into the presentation currency
• unrecognised unrealised profit in closing balances
• no documented, reproducible consolidation procedure

How we help groups in Uzbekistan

Leader Audit is an audit firm. Over 13 years of practice we have carried out more than 220 audits and worked with companies that needed financial statements under international standards.

We help define the perimeter, align accounting policies, set up a procedure for reconciling intragroup balances and present the result so that it stands up to an audit. The scope of work depends on the group structure, so we always start with a review.