Each of these entities reports its own financial statements and operates its own business.
A company that owns more than 50 percent equity in another firm must consolidate, or combine, its results with the subsidiary’s data.
Consolidation also applies if the firm owns less than 50 percent but exerts significant influence over the way the subsidiary operates.
However, because the subsidiaries are considered to form one economic entity, investors, regulators, and customers find consolidated financial statements more beneficial to gauge the overall position of the entity.
The consolidated financial statements only report income and expense activity from outside of the economic entity.