Consolidated accounts (also called group accounts) are financial statements that combine the results and financial position of a parent company and all of its subsidiaries into a single set of accounts, as if the group were one economic entity. They are required by the Companies Act 2006 and prepared in accordance with FRS 102 (Section 9) or IFRS for listed groups.
The purpose of consolidation is to give shareholders and other users a complete picture of the group’s financial performance and position, removing the distortion that can arise from transactions between group companies.
When Are Consolidated Accounts Required?
A parent company must prepare consolidated accounts if it has one or more subsidiaries at the end of its financial year.
What Is a Subsidiary?
Under the Companies Act 2006 (section 1162), a company is a subsidiary if the parent:
- Holds a majority of the voting rights (more than 50%)
- Is a member and has the right to appoint or remove a majority of the board
- Has the right to exercise dominant influence via the articles or a control contract
- Is a member and controls a majority of the voting rights through agreement with other shareholders
Exemptions from Consolidation
Small Group Exemption
A group is exempt from consolidation if it qualifies as a small group meeting two of three criteria (on a net or gross basis). For financial years beginning on or after 6 April 2025, the limits are:
| Criteria | Net | Gross |
|---|---|---|
| Aggregate turnover | Up to £15 million | Up to £18 million |
| Aggregate balance sheet total | Up to £7.5 million | Up to £9 million |
| Aggregate employees | Up to 50 | Up to 50 |
“Net” means after consolidation adjustments; “gross” means before.
Other Exemptions
| Exemption | Condition |
|---|---|
| Intermediate parent | The parent is itself a subsidiary of an EEA parent that prepares consolidated accounts |
| All subsidiaries excluded | All subsidiaries fall within the permitted exclusion categories (severe long-term restrictions, held exclusively for resale, immaterial) |
The Consolidation Process
Step 1: Align Accounting Policies
All group companies must use the same accounting policies (depreciation methods, stock valuation, revenue recognition). If a subsidiary uses different policies, its figures are adjusted before consolidation.
Step 2: Align Reporting Dates
Subsidiary accounts should be prepared to the same reporting date as the parent. If the dates differ by more than three months, interim accounts must be prepared for the subsidiary.
Step 3: Combine Line by Line
Add together each line of the income statement and balance sheet for all group companies:
| Line | Parent (£) | Subsidiary (£) | Combined (£) |
|---|---|---|---|
| Turnover | 800,000 | 300,000 | 1,100,000 |
| Cost of sales | (400,000) | (180,000) | (580,000) |
| Gross profit | 400,000 | 120,000 | 520,000 |
Step 4: Eliminate Intercompany Transactions
Transactions between group companies must be removed to avoid double-counting:
| Elimination | Example |
|---|---|
| Intercompany sales | Parent sells goods to subsidiary for £100,000 – remove from both turnover and cost of sales |
| Intercompany balances | Parent owes subsidiary £50,000 – remove from both debtors and creditors |
| Intercompany dividends | Subsidiary pays parent £30,000 dividend – remove from parent’s income and subsidiary’s distribution |
| Unrealised profit in stock | Parent sold goods to subsidiary at a £15,000 mark-up; goods still in subsidiary’s stock at year end – remove the unrealised profit |
| Intercompany loans | Loan from parent to subsidiary – eliminate the asset and liability |
Step 5: Calculate Goodwill
Goodwill arises when the purchase price of the subsidiary exceeds the fair value of its identifiable net assets at the date of acquisition:
Goodwill = Purchase Price - Fair Value of Net Assets Acquired
| Item | £ |
|---|---|
| Purchase price | 500,000 |
| Fair value of net assets | 380,000 |
| Goodwill | 120,000 |
Under FRS 102, goodwill is amortised over its estimated useful life (maximum five years unless a longer period can be justified, up to ten years). It must also be reviewed for impairment if there are indicators that its value has fallen.
Step 6: Recognise Non-Controlling Interests
If the parent does not own 100% of a subsidiary, the minority shareholders’ interest (the non-controlling interest or NCI) must be shown separately:
- On the balance sheet: NCI is presented within equity but separately from the parent’s equity
- On the income statement: profit attributable to NCI is deducted from group profit
Example: Parent owns 80% of subsidiary. Subsidiary’s profit is £120,000:
| Item | £ |
|---|---|
| Profit attributable to parent (80%) | 96,000 |
| Profit attributable to NCI (20%) | 24,000 |
| Total subsidiary profit | 120,000 |
Consolidated Income Statement
| Line | £ |
|---|---|
| Group turnover | 1,000,000 |
| Cost of sales | (520,000) |
| Gross profit | 480,000 |
| Administrative expenses | (250,000) |
| Amortisation of goodwill | (24,000) |
| Operating profit | 206,000 |
| Interest payable | (15,000) |
| Profit before tax | 191,000 |
| Corporation tax | (47,750) |
| Profit for the year | 143,250 |
| Attributable to owners of the parent | 131,250 |
| Attributable to non-controlling interests | 12,000 |
Consolidated Balance Sheet
| Line | £ |
|---|---|
| Non-current assets | |
| Goodwill | 96,000 |
| Tangible fixed assets | 650,000 |
| Total non-current assets | 746,000 |
| Current assets | |
| Stock | 120,000 |
| Accounts receivable | 180,000 |
| Cash | 85,000 |
| Total current assets | 385,000 |
| Total assets | 1,131,000 |
| Current liabilities | (280,000) |
| Non-current liabilities | (200,000) |
| Net assets | 651,000 |
| Equity | |
| Share capital (parent only) | 100,000 |
| Retained earnings | 481,000 |
| Equity attributable to owners of parent | 581,000 |
| Non-controlling interests | 70,000 |
| Total equity | 651,000 |
Consolidated Accounts and the Audit
Groups that exceed the small group threshold must have their consolidated accounts audited. The group auditor:
- Audits the parent company accounts
- Reviews or re-performs work on subsidiary accounts (which may have different auditors)
- Verifies consolidation adjustments and goodwill calculations
- Issues an opinion on the group accounts as a whole
Consolidated Accounts and Corporation Tax
Each company in the group is taxed separately for corporation tax. Consolidated accounts are not submitted to HMRC. Each subsidiary files its own CT600 return. However:
- Group relief allows losses in one group company to be surrendered to another, reducing the group’s overall tax liability
- Transfer pricing rules require intercompany transactions to be at arm’s length
- Capital gains can be transferred within a group tax-free under the capital gains group provisions
Associates and Joint Ventures
Companies that are not subsidiaries but over which the group exercises significant influence (typically 20-50% shareholding) are treated as associates:
- Associates are accounted for using the equity method in consolidated accounts
- The group’s share of the associate’s profit is shown as a single line on the income statement
- The investment in the associate is shown on the balance sheet at cost plus the group’s share of post-acquisition profits
Joint ventures (jointly controlled entities) are also accounted for using the equity method under FRS 102.
Practical Challenges
| Challenge | How to Address |
|---|---|
| Different accounting software across group companies | Standardise systems or use consolidation software |
| Different year-end dates | Align dates or prepare interim accounts |
| Intercompany balance differences | Reconcile before consolidation; investigate and resolve mismatches |
| Complex group structures | Document the structure clearly; seek specialist advice |
| Foreign subsidiaries | Translate using the closing rate for balance sheet, average rate for income statement |
| Goodwill impairment assessment | Review annually; engage valuers if necessary |
Filing Consolidated Accounts
Consolidated accounts are filed at Companies House alongside the parent company’s individual accounts. The filing deadline is the same as for the parent (9 months for private companies). Both sets of accounts must be approved and signed by the directors.