Consolidation

What it means

Consolidation prepares accounts for a group of companies as though it were a single entity. Intra-group receivables, payables, sales and profits are eliminated so that turnover which never left the group is not shown.

The obligation to prepare consolidated accounts falls on the parent once the Accounting Act’s conditions are met; smaller groups are exempt under stated conditions.

Not every holding is consolidated in the same way. Subsidiaries are included by full consolidation, with every line item and a separate non-controlling interest, while associates are brought in only by the equity method, through the value of the holding. The difference between what the parent paid for a subsidiary and its share of the fair value of the subsidiary’s net assets appears in the consolidated accounts as goodwill.

How it works in practice

It rests on a single methodology: the same accounting policies, the same reporting date, and intra-group transactions recorded separately so they can be removed. Done only once a year, consolidation turns into reconstruction.

Groups with a foreign parent often require an IFRS package. Intra-group relationships are also relationships between related parties, with everything that implies for transfer pricing.

An owner of several small s. r. o. companies usually has no duty to consolidate, but a bank lending to the whole group wants to see the figures together. For such clients we prepare a simplified combined overview that strips out invoices and loans between the companies. It is not statutory accounts, but it shows how the group really performs and where it stands on its covenants.

What to watch out for

Consolidated accounts are filed with a consolidated annual report and are subject to audit. The usual finding is unmatched intra-group balances - one side carries a receivable, the other a payable in a different amount or a different period.

A less visible mistake is unrealised profit left in inventory. When one company sells goods to another at a margin and they are still in stock at the reporting date, the group’s profit exists only on paper and has to be eliminated. If the elimination is forgotten, the consolidated result is overstated, and the auditor usually spots it as soon as they look at intra-group sales.