In topic II, we have learned the difference between consolidated and separate reports. Today, we learn topic 3 - Consolidated financial statement preparation.

Firstly, we explore the school of consolidated financial statements in accounting.

We temporarily use the word “school” to remember easily. There are two schools of consolidated financial statements that are commonly used in practice.

The first school: step 1 is separating items in the reports of the subsidiary, which is owned by the parent company; step 2 is adding the reports of the parent company to the report of the subsidiary. This school had been applied when consolidation standards had not yet developed, consolidation regulations had been simple and limited in one country.

The second school: step 1 is adding all items in the reports of the parent company and subsidiary, and step 2 is adjusting for duplicate items. This school is applied to most countries in the world. Vietnam also applies to this school.

Consolidation is a difficult topic so there are many authors who proposed consolidated financial statements preparation in Vietnam. In our experience, it is recommended that the most standard consolidated financial statements preparation in Vietnam is Circular 202 of the Ministry of Finance dated December 22, 2014.

The following is a summary of the preparation of the Balance sheet, and income statement between the parent company and subsidiaries.

1. Consolidation items in the balance sheet and income statement of the parent company and the subsidiaries in the group.

2. Excluding the carrying amount of the parent company's investment in each subsidiary, the portion of the parent's net assets held in the subsidiary's equity, and goodwill or profit from cheap purchase transactions (if any) are recognized.

3. Allocation of goodwill (if any).

4. Separation of non-controlling shareholder interest.

5. Excluding all internal transactions within the group.

6. Prepare a summary table of adjusted entries, and a summary table of consolidated items.

7. Prepare the Consolidated Financial Statements based on the summary stable of consolidated items after adjustment and excluding transactions arising within the group.

When consolidating reports, you need to pay attention to:

• Before the consolidation, the separate reports have to be adjusted with the same accounting policies.
• The consolidated financial statements can increase or decrease the amount of corporate income tax. The group have not to adjust the budget relationship because Vietnam does not have a tax mechanism for the consolidated financial statements.
• Exclusion of all group transactions is excluding 100% of internal transactions, even though the parent company does not fully own 100% of the subsidiary. A business has not to exchange, buy, sell, profit or loss itself or have a part of it, in order to prevent overstatement of reporting.