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consolidated financial statements

The consolidation in financial terms means the grouping of financial statements available of two or more economic entities legally independent of each other.

It can also be defined as the financial statements that result from combining the financial statements of the parent companies and their subsidiaries. Below are several important concepts related to the consolidated financial statements.

Holding company:

It is a company that owns 25% or more of the ordinary shares of another company, the holding company is also called the controlling or principal.

Associated company:

It is a company of which the other company owns no less than 25% and no more than 50% of the ordinary shares outstanding.

Subsidiary company:

It is that company whose majority of ordinary shares (more than 50%) is owned by another company, that is to say, that they have the majority of shares with the right to vote of a company.

Affiliated company:

Are those companies that have no significant investments among themselves, have common shares.

To determine the return generated by the investment in shares of subsidiary companies, the Mexican Institute of Public Accountants recognizes the accounting method of participation.

Bulletin B-8 of the Accounting Principles Commission of the Mexican Institute of Public Accountants defines the consolidated financial statements:

“The consolidated financial statements are those that present the financial situation and an operating result of an entity composed of the holding company and its subsidiaries (regardless of their legal personalities) and are formulated replacing the investment in shares of subsidiaries of the holding company. and liabilities of those and eliminating the balances and operations carried out between the different companies, as well as the profits not made by the entity “.

The consolidation of financial information can be presented in two ways:

a) Vertical Consolidation:

When consolidating companies linked by staggered or complementary activities, such as companies dedicated to the generation of agricultural resources and their subsequent industrialization and commercialization.

b) Horizontal Consolidation:

When consolidating companies with similar activities are grouped, for example, self-service chains and department stores, when each of them is a legally independent entity.

Rules for the consolidation of the Statement of Financial Position:

1. As a general rule, all the subsidiary companies of a holding company must be part of the consolidated financial statements.

2.- The consolidation should include all those subsidiaries of which there is control of shares with the right to vote, even though the majority is that they have the capital majority.

3. In the consolidation, they must exclude concepts of receivable and payable among the companies that are consolidated.

4. The investments of the holding company in its main subsidiaries must be eliminated.

5. In cases where the holding company does not own all of the shares, the proportion of the minority or majority interest must be treated as a liability for consolidation purposes.

6. In order for the consolidated financial statements to present a financial situation and results of operations, generally accepted accounting principles should be applied uniformly when the circumstances are similar.

7. The financial statements of the subsidiaries must be presented on the same date or with a difference that does not exceed three months from the date of the consolidated financial statements.

It may be the case that the process of consolidating one or more subsidiary companies, this may be due to the following exceptions:

a) Subsidiaries in foreign countries in which there is control of changes and/or restrictions to remit profits to the parent or holding office:

b) Subsidiaries dedicated to activities different in nature to those carried by the rest of the economic group.

The consolidated financial statements, even when presenting the financial situation of a group of companies, have important limitations that are mentioned below:

1. The individual financial situation of the holding company is not disclosed, nor is the individual financial situation of the holding company, nor of the financial situation of the subsidiary companies; so they can remain hidden, without knowing certain situations or contingencies that affect some or some of the companies.

2. The situation of the distributable profits is not reflected, as well as the distribution of funds since this situation is determined by each company individually.

3. The return on investment or on assets is not disclosed individually by the company.

4. A grouping of non-uniform accounts can be presented in the concepts and values since the financial information of the subsidiary companies is prepared under accounting standards and principles.