The consolidated financial statements combine the financial statements of all the entities within a group. The entities in the group consist of two types; namely (a) parent and (b) subsidiary. There is only one parent in a group, which is the controlling entity. This means the entity that controls all other entities in the group is a parent. All other entities (controlled entities) in the group are called subsidiaries. There are a number of prime reasons or purpose of consolidated financial statements as to why they are prepared.
1. In Order to Supply of relevant information to investors: The information obtained from the consolidated financial statements (CFS) is relevant to investors in the parent entity. These investors have an interest in the group as a whole. They have interest not just in the parent entity only but in subsidiary also. To ensure these investors to obtain their required information from the financial statements, consolidation is made. The entities comprising the group would place a large cost burden on the investors.
2. To provide Comparable information: Some entities are organized into a group structure such that different activities are undertaken by separate members of the group. Other entities are organized differently, with some having all activities conducted within the one single entity. Consolidated financial statements (CFS) make the comparative analysis an easier task for an investor who wants to make useful comparisons between entities.
3. To ensure Accountability: A prime purpose for all financial reporting is the discharge of accountability by the Management. Entities that are responsible or accountable for managing a pool of resources are generally required to report on their activities. Because, they are the recipients of economic benefits and are responsible for payment of obligations. Hence, are held accountable for the management of those activities. The management of the parent entity is not just responsible for the management of the assets of the parent itself. As the parent controls the assets of all subsidiaries, the assets under the control of the parent entity’s management are the assets of the group. The consolidated financial statements (CFS) report the assets under the control of the group management as well as the claims on those assets.
4. Reporting of risks and benefits: There are risks allied with managing an entity, and an entity rarely obtains control of another entity without obtaining significant opportunities to benefit from that control. The consolidated financial statements (CFS) allow an assessment of these risks and benefits.
Internal management and external investors or stakeholders realize the importance of consolidated financial statements (CFS) because they serve as decision making tools.