5 disadvantages of consolidated financial statements

5 disadvantages of consolidated financial statements.

Consolidated financial statements are the “Financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent (company) and its subsidiaries are presented as those of a single economic entity”.

The following are shortcomings of consolidated financial statements:

Unprofitable companies are set off against profitable companies and are thus concealed.

Intragroup transactions may represent a substantial portion of companies’ activities. The reversal of inter company transactions, whether these are at ‘arm’s length’ or not, may result in figures such as reported turnover, not representing the true level of the group’s activities.

The holding company is not legally bound to honour the obligation of its subsidiaries. This further invalidates the use of ratios such as the current ratio, the debt-equity ratio.

The result and financial position reported per the consolidated financial statements are difficult to evaluate where the group consists of various operations (e.g manufacturing and banking). The different constituent parts would have different profiles of profitability risk and growth.

The statement of financial position gives no indication of individual companies’ assets and liabilities and ratios calculated on the consolidated statements of financial position are merely group averages. As such, they cannot highlight problem areas of individual companies.

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