The distinction between individual entity financial statements and consolidated financial statements

General distinction

There is an important distinction between the financial statements of an individual entity, such as a company, and the consolidated financial statements of a group. An entity for this purpose could take a number of forms; the most common example is a single company, but an entity for accounting purposes could be a partnership or an unincorporated association – that is, it does not need to have separate legal personality. A group typically comprises a parent company and a number of subsidiary undertakings, but again the parent and the subsidiary undertakings need not be companies.

Individual entity financial statements, sometimes called ‘single entity’, or ‘solus’, financial statements, are the financial statements of the entity itself. Thus, where a company transacts its business through subsidiaries rather than directly itself, its individual entity financial statements will record an investment in one or more subsidiaries in its balance sheet and will record dividend income in arriving at profit/loss. The trading transactions will be included in the individual entity financial statements of the subsidiaries themselves and are not reflected in the parent's individual entity financial statements.

It is generally accepted, therefore, that the individual financial statements of a parent entity, while they have some uses, do not properly reflect the parent's results, assets and liabilities. Hence, for many years, it has been the practice to prepare ‘group financial statements’ for groups of companies, albeit with exceptions as discussed below. Group financial statements now almost exclusively take the form of consolidated financial statements. In practice, the terms ‘group financial statements’ and ‘consolidated financial statements’ are used interchangeably.

Consolidated financial statements aim to present a picture of the group as a whole as if the group were a single entity.