What is a Consolidated Financial Report? How Is It Audited?
8 minute read
A consolidated financial report is a report in which, as a single legal entity, a company and its subsidiaries present their:
- Cash flows
But how is this report handled in Hong Kong? And what are the requirements for it?
What are the general financial reporting requirements?
Since Hong Kong is a Special Administrative Region of China, its accounting standards are regulated by its own Companies Ordinance and the Hong Kong Financial Reporting Standards. These fully converged with the International Financial Reporting Standards (IFRS) in 2005.
The IFRS is a set of international accounting standards that apply to all financial reporting, quality control, and auditing standards relating to all profit-oriented entities. However, keep in mind that some entities can choose to apply a different set of reporting standards.
In Hong Kong, various types of entities such as private entities and small to medium-sized entities can choose to apply a different set of reporting standards. This relieves them of the full reporting requirements under the HKFRS.
According to the law, under section 379 of the Hong Kong Companies Ordinance (CO), a company director has to prepare a financial year statement that complies with the requirements of sections 380 and 383 of the CO.
These statements are then transferred to third-party auditors in the auditing process to form the annual statutory audit reports.
What is a consolidated financial report?
In Hong Kong, a company that controls one or more entities at the end of the financial year has to prepare a consolidated financial report that complies with sections 380, 381, and 383 of the CO.
The financial report has to present the group’s complete assets, liabilities, equity, income, expenses, and cash flows of the parent and subsidiary companies. Remember, in this case, these all make a single economic entity.
If an individual owns a company in Hong Kong, a consolidated financial report is mandatory.
On the other hand, if a company is owned by a body corporate, some exemptions may apply.
According to section 379(3) of the CO, companies can be exempt from preparing consolidated financial reports in case they meet one of the listed conditions:
- If a company is owned completely as a subsidiary of another body corporate in the financial year, the exemption can occur.
- If a company is a partially owned subsidiary of another body corporate in the financial year and the director meets the notification requirements provided in the CO, and no one objects to the notification provided by the director, the exemption can occur.
Companies that do not prepare a consolidated financial statement (and are not exempted) should expect an auditor’s qualified opinion in the audit report on the company’s non-compliance with CO.
What is the purpose of consolidated financial statements?
As a statement of financial position, a consolidated statement serves to present the results of operations and the financial position of a parent company and its subsidiaries as if the group were a single entity with one or more branches. These statements are primarily there for the benefit of the shareholders and creditors of the parent company.
Consolidated financial reports are more useful than separate statements and they are necessary for a fair presentation when one of the companies of the group directly or indirectly has a controlling financial interest in the other companies.
So, for instance, let’s say that you want to grow your company. In order to do so, you may expand by buying smaller companies. These subsidiaries usually continue to operate as separate entities. But, they are under the control of the parent company.
However, each company maintains separate consolidation accounting records. These separate accounting records are then consolidated with the parent company’s accounting records to produce consolidated finances in the end.
The end result (a consolidated financial report) makes a business’s finance records more efficient and the business owner’s life easier to a great extent.
What is the difference between combined financial statements and consolidated financial statements?
A company with subsidiary branches can use combined statements. The combined financial statement collectively lists the activities of a group of connected companies into a single document. Even though they are combined, the financial statements of each entity remain separate. Each subsidiary company appears as a stand-alone company.
The obvious benefit of a combined financial statement is that investors are allowed to analyze the results of the corporation on the whole and then gauge the performance of the individual subsidiary companies separately.
Contrary to that, a consolidated financial report aggregates the financial position of both the parent company and its subsidiaries into a single report. A combination such as this one allows an investor to check the overall wellbeing of the whole company instead of seeing the financial statements of each segment of the business separately.
Furthermore, in consolidated statements, there are no increases in items for things such as stock value and retained earnings. But, in a combined statement, the stockholders’ equity is added across the accounts.
Finally, when consolidating statements, income, and expenses from the subsidiary add to the parent company’s income statement. Similarly, when combining financial statements, income and expenses are added across the companies for a group total. This addition has as its effect an increase in the group’s income as compared to the figures that would appear if the companies reported separately.
How do you prepare a consolidated financial statement?
When preparing consolidated financial statements, there are a few things to have in mind.
- First of all, it is vital to combine balance sheets such as assets, liabilities, equity, income, and cash flow between the parent company and its subsidiaries. Additionally, convert different currencies into the same presentation currency (if there are foreign operations).
- Then, remove the carrying amount on the parent company’s investment in the subsidiaries and the parent equity holdings in each subsidiary.
- Last but not least, remove intercompany assets, liabilities, and equity in the balance sheet along with expenses and transactional flows between entities of a given group (the parent company and its subsidiaries).
The output process with combined figures is reflected in Consolidated Management accounts. These are usually exported as Excel files. The final figures in consolidated management accounts are to be presented in the unaudited or audited financial statements.
Directors are held responsible to present the statements and lay them out before the company at the annual general meeting. The statements have to comply with Accounting Standards issued by the Accounting Standards Council.
How will the company be audited?
If you own a business in Hong Kong, it is important to understand accounting, bookkeeping, and auditing standards to avoid the risk of faulty tax filings.
Bear in mind that the only licensed entity in Hong Kong responsible for registering and certifying accountants is the Hong Kong Institute of Certified Public Accountants.
This legal body is responsible for the issuance of Hong Kong Standards on Auditing, Quality Control, Assurance, and Related Services. This is submitted in an annual tax assessment by the Inland Revenue Department. The HKICPA members observe the accounting and auditing standards.
Hong Kong incorporated companies have to get their financial statements audited by a registered and certified public accountant.
The purpose of conducting an audit is to make sure that the information and documents submitted to the IRD in the financial statements are accurate with no internal bias.
The audit of taxes, profits, and financial statements is done by a third party (CPA) to ensure compliance with laws regarding taxes in Hong Kong.
To avoid any mistakes and false audit reviews, the IRD requires a third-party audit review of accounts and financial statements of companies in Hong Kong.
How to ensure that you comply?
Companies should learn the basics of the Hong Kong accounting standards prescribed by both the HK CO and HKFRS to make sure that they are compliant with the provisions stipulated there.
If a company has the consolidation audit report from the previous year but chooses to change to a non-consolidation audit report in the current year, they shall have to seek professional assistance in maintaining consistency in the various audit accounts since the Hong Kong Inland Revenue Department will likely inquire about the reason for the change.
Also know that operating a modern accounting software system may help alleviate significant workload by automating some COA mapping and GAAP conversion tasks.
Hence, multinationals looking to consolidate financial statements across multiple jurisdictions should consider upgrading their ERP system where necessary, and properly configuring their accounting software to guarantee effective and compliant bookkeeping at each location.
Can a company be exempt from the audit?
To qualify for reporting exemption under the CO, you have to ensure a few things.
- A small private company (or a holding company) of a group of small private companies has to meet two of the following conditions in a financial year:
- Total revenue (or aggregate total revenue) shall not exceed $100 million.
- Total assets (or aggregate total assets) shall not exceed $100 million.
- Employees (or aggregate number of employees) shall not exceed 100.
- Another private company (or companies) that is not a member of a corporate group should have a written unanimous agreement between the members.
- A small guarantee company (or holding of a group of small guarantee companies) shall not exceed $25 million in a financial year.
- An eligible private company (or a holding company of a group of eligible private companies) that meets higher size criteria and with 75% approval from members of the holding company. No member shall vote against the resolution.
- A holding company of a group of companies comprising one or more small private companies (or eligible private companies and one or more small guarantee companies provided that the holding company and its subsidiaries meet the prescribed size criteria) has 75% approval from members of the holding company and no member votes against the resolution.
The group of companies may include non-Hong Kong body corporates.
If a company meets the listed criteria for the reporting exemption, the exemption shall be available to the company in the first financial year that begins on or after the commencement of the new CO or the Companies (Amendment) (No. 2) Ordinance 2018 and in every subsequent financial year until the company gets disqualified.
Start handling your statements properly
It is of the utmost importance to know how to consolidate financial statements in order to show financial results to investors and other relevant parties.
As a thriving business owner, you should try to generate accurate statements that reflect the state of all connected entities along with the parent company and its assets.
You need to stay on top of the consolidation accounting game if you want to be a part of the elite. If you need any help, consult Sleek and we will be there for you. Our experts guarantee flawless financial statements and compliance with the law.