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  The Argument against Consolidation

Introduction to the Argument against Consolidation

There appears to be a compelling logic for consolidating the results of subsidiaries controlled through a parent company, to imitate the fact that the shareholders of the parent company efficiently control all of the assets of all of the companies in the group. Though, there is also a quite strong argument against doing so.

A person who is reading the consolidated financial statements of a group of companies could be mislead into believing that trading with any member of the group would, effectively, be similar like trading with the group like a whole. It may be supposed that all of the assets of group could be called upon to meet any amounts owed through any member of the group. Though, this would be not true. Only the assets owned through the specific group member would be accessible to any creditor of that group member.

The reason behind this is the legal separateness of the limited company from its shareholder(s) that in turn leads to limited liability of individual group members. There would be completely no legal obligation on a parent company, or a fellow subsidiary, to assemble the financial obligations of a struggling subsidiary. Actually this is a reason why some businesses operate by a series of subsidiaries.

Regardless of this criticism of consolidation, the need to prepare group financial statements is an extremely popular legal need throughout the world.

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