Definition of Consolidated Accounting Units and Their Importance

Consolidated accounting units are the consolidated financial statements of a parent company and its subsidiaries that are treated as a single economic unit.

Their importance lies in showing the true financial position of the group and avoiding duplication of operations between related companies, providing comprehensive and accurate information to investors and lenders, achieving compliance with international accounting standards, and improving transparency and quality of financial reporting.

Conditions and Criteria for Accounting Consolidation

Accounting consolidation conditions require effective control by the parent company over the subsidiary through owning more than 50% of common shares or voting rights, or effective control through special agreements even with lesser ownership.

Consolidation criteria include continuity of control, harmonized fiscal year or ability to adjust, use of unified accounting policies, and absence of material restrictions on fund transfers. Elimination of intercompany transactions and clarification of minority rights in non-wholly owned subsidiaries are also required.

Types and Methods of Accounting Consolidation

Types of Consolidation:

Full consolidation: Consolidating 100% of subsidiary's assets and liabilities (control over 50%)

Proportional consolidation: Consolidating only parent company's share (joint ventures)

Equity method: Recording investment at cost + share of profits (control 20-50%)

Consolidation Methods:

Purchase method: Consolidating at fair value showing goodwill

Pooling of interests method: Consolidating at book values (rarely used currently)

Procedures for Preparing Consolidated Financial Statements

Preparation:

• Collecting financial statements of parent and subsidiary companies
• Unifying accounting policies and fiscal year
• Determining ownership percentages and control date

Elimination Entries:

• Eliminating investment in subsidiary against equity
• Removing intercompany transactions (sales, purchases, debts)
• Eliminating unrealized profits from internal transactions

Adjustments:

• Calculating goodwill or bargain purchase
• Determining minority interests in subsidiaries
• Unifying currencies for foreign companies

Consolidation:

• Combining assets, liabilities, revenues, and expenses
• Preparing consolidated statement of financial position
• Preparing consolidated income statement

Review:

• Ensuring accounting balance
• Preparing supplementary notes
• Reviewing compliance with accounting standards

Challenges and Accounting Treatments for Consolidation

Consolidation challenges and accounting treatments include several key difficulties such as differing accounting policies between companies, multiple currencies in foreign companies, complex intercompany transactions, difficulty determining fair value of assets, calculating goodwill and its impairment. To address these challenges, accounting treatments require unifying accounting policies before consolidation, converting financial statements at appropriate exchange rates, completely eliminating internal transactions, using independent appraisers for valuation, and annually testing goodwill impairment, plus preparing detailed working papers for adjustments and periodic review for compliance with required accounting standards.