In standalone accounts and consolidated accounts, the major difference is that in consolidated accounts, the parent company and its subsidiaries are treated as a single entity. Thus, all the intra group transactions, i.e. the transactions between the parent and its subsidiaries or the transactions between the subsidiaries themselves are excluded. Let’s understand why the intra-group transactions are excluded through the example given below:
Suppose a company “A Ltd.” has a subsidiary named “B Ltd.”. A Ltd. sells goods to B Ltd and receives cash payment for the same. B Ltd. further sells these goods in the market. In standalone financial statements of A Ltd., this would be considered as revenue for A. But in consolidated financial statements of A Ltd., where A Ltd. and B Ltd. are considered as a single entity, this transaction would be seen as an entity selling something to itself. This doesn’t make sense because by doing so, an entity can keep selling goods to itself at higher prices and prop up its revenues. Also, if we count this as revenue in consolidated financial statements, it would lead to double counting of revenue {(revenue of A for selling the good) + (revenue of B if it sells the goods further)} for the same goods.
When A Ltd. sold goods to B Ltd., the transaction would have impacted 2 accounting heads due to dual-accounting system that is followed. One entry will be in sales account, which will increase the revenue. Another entry will be in cash account, thereby increasing the cash balance. So, while preparing consolidated financial statements, if you neglect the revenue from intragroup transaction, you must also neglect any other intragroup transactions. Only then will you be able to get a balance sheet that actually gets balanced on both sides. So, you will also have to neglect the related party cash entry that has taken place here.
Now, if these goods are sold on credit, the same logic applies and the intra-group transactions get cancelled out while preparing consolidated statements.
So, if a parent sells something to its subsidiary/subsidiaries on credit basis, then it will be reflected in trade receivables of standalone statements but not in trade receivables of consolidated statements.
If the difference in trade receivables in standalone and consolidated statements is considerably huge, then keep an eye on intra group sales as a percentage of total sales. Also check whether the money eventually flows into the company or not. This can be checked by looking at trade receivables footnote. If you can see heavy trade receivables outstanding for more than 6 months or more than one year, or heavy amount of trade receivables being written off, then one can say that something fishy might be going on in the company.
Some companies show sales to its subsidiaries on credit basis to portray inflated revenue and a higher revenue growth rate. But these sales are not true sales and hence, the cash from the same will never flow into the company. So watch out for the same too!
Please do not misunderstand this and consider this as a universal rule for all the companies. If you see similar trend emerging in a company, try to find out possible reasons behind it. What I explained above is to be assumed only if we are unable to find out any logical explanation for such trends.
Kashvi Gandhi 