Consolidated and separate financial statements

STEP 1The whole group vs. a single company

Consolidated and separate differ in 'how far to count as one company'. Let's sort out the scope first.

A big company does not work alone. It has overseas sales entities, parts factories, and subsidiaries running new businesses. When a parent company effectively controls a subsidiary, the parent is called the controlling company and the subsidiary is called a subsidiary. Control usually means holding a majority of voting rights, but accounting standards (K-IFRS 1110) judge it not by the ownership percentage alone but by whether the parent 'has the power to direct the relevant activities and its returns vary as a result'.

Consolidated financial statements combine the parent and its subsidiaries as if they were one company. They show the assets the whole group owns, the debts it owes, and the money it earned. Separate financial statements are those of the parent alone, where subsidiaries appear only as a single line for 'shares held (investments in shares)'. Korean listed companies have been disclosing consolidated statements as their primary financial statements since 2011, when International Financial Reporting Standards (K-IFRS) were fully adopted. So unless news or broker reports say otherwise, figures are usually on a consolidated basis.

Which was Robin Bakery so far?

You can think of the Robin Bakery numbers used in Lessons 6 to 10 (assets KRW 10 billion, liabilities KRW 4 billion, equity KRW 6 billion) as taken from the consolidated balance sheet in the annual report. However, until now Robin Bakery had no subsidiaries at all. With nothing to combine, consolidated and separate were identical. In this lesson, suppose Robin Bakery put in KRW 300 million to set up a cafe chain, 'Robin Coffee', and holds a 60% stake (fictional). The remaining 40% was funded by another investor with KRW 200 million. For the first time, consolidated and separate now diverge.

By analogy, separate is 'Dad's bank account' and consolidated is 'the whole family's account'. When you build the family account, the allowance Dad gave the kids is, from the family's point of view, just money moving between pockets, so it is neither income nor spending. That is exactly why intragroup transactions are removed in consolidation.

STEP 2What gets removed and what gets split when combining

Let's combine the two balance sheets ourselves. One addition, two subtractions and one division complete the consolidation.

First, the year-end balance sheets of the two companies. Robin Bakery (separate) differs from the numbers in earlier lessons only in that KRW 300 million of cash became KRW 300 million of Robin Coffee shares. Over the year, Robin Coffee sold KRW 600 million worth to customers and made KRW 100 million, of which KRW 200 million worth of bread was bought from Robin Bakery. By year-end it had not yet paid KRW 100 million of that bread bill. All numbers are fictional. Press the step buttons below one at a time.

Subtraction 1: investment shares and the subsidiary's equity

Simply adding them up would count the same money twice. The KRW 300 million that Robin Bakery paid is in Robin Bakery's books as 'investment shares KRW 300 million' and in Robin Coffee's books as 'share capital KRW 300 million'. From the whole group's point of view it is just money moving between pockets, so KRW 300 million is erased from both sides.

Subtraction 2: transactions within the group

KRW 100 million of Robin Bakery's trade receivables is money to be collected from Robin Coffee, and KRW 100 million of Robin Coffee's liabilities is money owed to Robin Bakery. For the group as a whole it is 'money I lent to myself', so both are removed. The same goes for the income statement. The KRW 200 million of bread Robin Bakery sold to Robin Coffee is not sales that left the group, so consolidated sales are KRW 12 billion + KRW 600 million − KRW 200 million = KRW 12.4 billion. This cleanup is called intercompany elimination. It is why inflating sales by trading goods between subsidiaries does not work in consolidated statements.

Division: the parent's share and non-controlling interest

Only 60% of Robin Coffee belongs to Robin Bakery. Even so, consolidation adds 100% of Robin Coffee's assets and liabilities. Instead, the other investors' 40% share of equity is shown separately as non-controlling interest. K-IFRS 1110 defines non-controlling interest as 'equity in a subsidiary not attributable, directly or indirectly, to a parent'. 40% of Robin Coffee's KRW 600 million of equity, or KRW 240 million, is non-controlling interest, and the remaining KRW 6.06 billion (Robin Bakery's KRW 6 billion of equity plus 60% of the KRW 100 million Robin Coffee earned, or KRW 60 million) is equity attributable to owners of the parent.

STEP 3Which number to look at, and when

Consolidated is the default, but there are moments when separate matters more. Put the two numbers side by side and pick the right one.

Use the 'owners of the parent's share' for P/E and ROE

In Lesson 1, we calculated Robin Bakery's EPS as net income KRW 1.2 billion ÷ 2 million shares = KRW 600. After Robin Coffee came along, consolidated net income is KRW 1.3 billion, but KRW 40 million of that belongs to Robin Coffee's other shareholders. Robin Bakery shareholders' share is KRW 1.26 billion, so EPS is KRW 1.26 billion ÷ 2 million shares = KRW 630. At a share price of KRW 9,000, P/E is about 14.3x. Accounting standards also require basic EPS to be calculated on profit attributable to the parent's ordinary shareholders, and the 'profit attributable to owners of the parent' in broker reports is the same concept. Use this number when calculating P/E and P/B in Lesson 37 of Learn (Economics).

When separate matters more: holding companies

A holding company is a company whose main business is owning shares in several subsidiaries and controlling the group. A holding company's separate sales are mostly dividends from subsidiaries, brand royalties, and rent, so consolidated and separate figures differ greatly. For such a company, use the consolidated statements to see how much the whole group earns, and the separate statements to see how much debt the holding company itself carries and where it gets the cash to pay dividends. Even if the group as a whole is strong, the holding company alone may carry a lot of debt.

Separate is also used when looking at dividend capacity. In Korea, dividends are decided company by company, so the dividends a parent can pay shareholders are affected by the parent's retained earnings and cash position. Dividend metrics are covered in more detail in Part 5.

Find it yourself on DART

Open III. Financial Matters in an annual report and you will find consolidated and separate statements listed separately. The actual order of the table of contents we checked in Lesson 5 is below. The green 'C' (consolidated) badge next to a report name in the DART search results list from Lesson 3 means the report includes consolidated financial statements.

There are two tips. First, when you write down a number, check whether the table title says 'consolidated'. Second, under equity on the consolidated balance sheet, find the two lines 'equity attributable to owners of the parent' and 'non-controlling interest'. If non-controlling interest makes up a large part of equity, it means a large share of the group's results belongs to other shareholders.

How to use it in investing

That is not always the case. For a company with almost no subsidiaries, consolidated and separate are nearly the same, so either can be used. Conversely, for exporters with many overseas entities or holding companies, the difference is large, so you should first check which basis the number in an article is on. All numbers in this lesson are fictional examples and do not recommend buying or selling any particular company.