Consolidated / Group accounts are the financial statements of the companies that are under the same control, showing the financial results of those companies. Group accounts must be prepared by a company if it is a parent company at the end of a financial year as it is a legal requirement. If the parent company qualifies as a small parent company, then it has an exemption from the preparation of group accounts by the government of the UK. The preparation of the group accounts is the responsibility of the directors of the parent company. A parent company is a company that has control over another company, also known as the acquirer. The controlled company is called an acquiree or subsidiary company.
Basically, the group accounts are prepared by aggregating the financial results of individual company’s financial statements.
As each company is a separate legal entity, so each company prepares its separate financial accounts. The parent company then combines these financial statements into final consolidated accounts because the parent company and its subsidiaries are considered as one economic entity, so it will be helpful for the stakeholders (i.e. potential investors, customers, shareholders) in gauging the position of the whole entity.
The contents of group accounts include consolidated statement of financial position, consolidated statement of profit and loss and consolidated statement of cashflows. A consolidated statement of financial position includes the assets, liabilities, and equity of the group. The consolidated statement of profit and loss shows the expenses, losses, revenue, and profits of the group. The consolidated statement of cash flows shows the inflows of outflows of the group as a whole during the reporting period.
When filing, the accounts must also be accompanied by:
- A director’s report with the signatures of the director or secretory and their printed name, including a strategic report (business review)
- An auditors’ report (if not exempted) stating the name of the auditor, and be signed and dated by the auditors
There are some rules that companies using group accounts must follow.
The main one tells that intercompany transactions must not be included in group accounts in order to unfairly improve results or tax owed. So, these must be excluded. Similarly, different standards tell the different percentages of ownership for the subsidiaries that are required to be included in consolidated statements.
There are certain benefits for the group companies. One of the most highlighted ones is group relief. Group relief allows trading losses of one company to be written off against the other companies of the same group. The company which made losses and surrendered the losses to the group member company is known as the “surrendering company” while the one which claims the losses of the surrendering company is called a “claimant company”. The surrendered loss will reduce the liability of the corporation tax of the claimant company.
In some cases, although it is not in statutory rules, the surrendering company will be paid by the claimant company up to an amount of tax saved. If the UK corporation tax rate is 20%, the surrendering company will be paid 20% of the losses surrendered, by the claimant company. That payment made will be ignored for tax purposes, so, this will not be expensed out against the profits of the claimant company or will be considered taxable income for the surrendering company.
For the claimant company, this is a neutral transaction. The amount paid to the group fellow is equal to the amount it would otherwise have to pay in the form of a corporation tax bill to HMRC. From the surrendering company’s point of view, the surrender of group relief transforms a loss that it might carry forward and use in later years, otherwise.
Not all types of losses are available for group relief. Some of the income losses that can be part of group relief are excess interest charges, expenses of management, and trading losses.
The group relief amount that can be surrendered is lower than the profits of the claimant company or losses of the surrendering company. If the group companies have the same accounting period, the group relief will be easily applied otherwise there are special rules that will be applied to time proportionate the group relief.
Another benefit of group accounts is they can file only one consolidated tax return for the whole group, which will result in less burden for management. Similarly, it gives investors, customers, and other stakeholders to analyze the performance of the parent company. Usage of a single account instead of using a lot of accounts can reduce the cost of subscription and licensing fees for the parent company.
There are some disadvantages of group accounts also like it is time-consuming and a lot of data is not included in group accounts. Moreover, as it is a consolidated statement, it is difficult to assess the performance of the individual company, for example, if there have been losses occurring in one subsidiary, the group accounts can give the impression that the overall group performance was not good.
Petutschnig, Matthias, Sharing the Group Benefits of a Common Consolidated Corporate Tax Base within Corporate Groups (May 4, 2011). Available at SSRN: https://ssrn.com/abstract=1831103 or http://dx.doi.org/10.2139/ssrn.1831103
Sotti, F., 2018. The value relevance of consolidated and separate financial statements: Are non-controlling interests relevant?. African Journal of Business Management, 12(11), pp.329-337.