Account consolidation: obligations and advantages for companies

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When dealing with a group of companies, each with its own individual accounts, understanding the overall status can be very difficult. To eliminate this limitation, there is the consolidation of accounts, a procedure that is not only very advantageous in these cases, but also mandatory for many companies.

What is account consolidation?
Account consolidation is an accounting procedure that consists of aggregating the financial statements of several companies within the same group into a single company, the parent company.

This procedure allows individual information to be combined on assets, liabilities, equity, income and expenses of the various companies, providing a global view of the group's financial situation.

In Portugal, the terms applicable to the obligation to consolidate accounts are hong kong whatsapp number database out in articles 6 to 8 of Decree-Law no. 158/2009, of 13 July , which approved the Accounting Standardisation System (SNC).

What is account consolidation for?
The main purpose of consolidating accounts is to complement the information in individual accounts by presenting the annual accounts of a group of companies as if they were a single entity. This makes it possible to analyse the financial status and performance of the group as a whole.

More than that, consolidation eliminates the effects of the group's internal transactions (for example, by eliminating reciprocal balances between the companies that are part of it), allowing the information presented to be as true as possible for a clean analysis.

Ultimately, it is through financial reporting that companies position themselves with all their stakeholders and, to this end, the reliable information and transparency provided by consolidation are essential.

Parent company and subsidiaries: what determines the difference?
For the purposes of distinguishing the companies that make up a business group, the following are defined:

parent company is one that owns one or more subsidiaries;
subsidiary is one that, even if not constituted under the legal form of a company, is controlled by the parent company.
What determines the difference is the exercise of control by one company over another (or others), that is, the power to manage the financial and operational policies of that/those entities, in order to obtain benefits from them.

Which entities are required to present consolidated accounts?
In general, when there is a group made up of several entities, one of which is the parent company, there is an obligation to consolidate accounts and it is the parent company's responsibility to present them for the entire group. However, there are exceptions.

Entities required to consolidate accounts
The rules that dictate the mandatory preparation of consolidated accounts are those described in article 6 of Decree-Law no. 158/2009.

According to what is established therein, the parent company must present consolidated financial statements relating to itself and its subsidiaries, in which, regardless of whether it holds capital, it is found that, alternatively:

exercises or may exercise dominant influence;
exercise management as if they constituted a single entity.
When the parent company holds capital , it is obliged to present consolidated financial statements whenever one of the following conditions is met:

have the majority of the voting rights, unless it is demonstrated that these do not confer control;
has the right to appoint or remove the majority of the members of the management body of an entity with powers to manage the financial and operational policies of that entity;
exercises a dominant influence over an entity, by virtue of a contract concluded with it;
holds at least 20% of the voting rights and the majority of the members of the management body of an entity with powers to manage the financial and operational policies of that entity, pursuant to subparagraph iv) of paragraph b) of paragraph 1 of article 6;
has the majority of the voting rights of the holders of the capital of an entity, either by itself or by virtue of an agreement with other holders of the capital of the same.
Entities exempted from the obligation to consolidate accounts
According to article 7 of the same Decree-Law, a parent company of a small group is exempted from preparing the consolidation of accounts , when, on a consolidated basis and at the date of the parent company's balance sheet, two of the following limits are not exceeded , during two consecutive financial years:

a balance sheet total of 6 million euros;
a net turnover of 12 million euros;
an average number of 50 employees during the financial year.
Parent companies that are themselves subsidiaries of a parent company subject to the law of an EU Member State are also exempt , provided that:

this person holds all the capital shares of the exempted entity; or
holds 90% or more of its capital shares and the remaining holders of the capital of that entity have approved the exemption.
Advantages of account consolidation
Despite being a somewhat complex and responsible procedure, even in cases where it is not mandatory, account consolidation has several advantages.

Integrated view of the group's financial status
Consolidating the various accounts into one makes it easier to analyse the current and historical status of the group as a whole, as well as its evolution. This not only reflects the overall results of the decisions taken in recent financial years, but also provides a basis for making more informed decisions regarding financial health and investments, from a broader perspective.

Comparability of information
The fact that the information is complete and free of impurities allows comparison not only with previous results of the same business group, but also with other companies and groups in the same sectors of activity.

Transparency in the provision of information
With consolidated accounts, there are no repetitions or redundancies that could affect their proper analysis, increasing the reliability and transparency of the information. This increases the credibility of the business group among its stakeholders, which is important, for example, for obtaining investments.