Consolidation net income is a financial metric that represents the combined net income of a parent company and its subsidiaries. It is calculated by adding the net income of the parent company and the net income of the subsidiaries, and then eliminating any intercompany transactions and balances between the entities.
Consolidation net income is used to evaluate the overall financial performance of a consolidated entity, which includes the parent company and its subsidiaries. It is typically reported on the income statement of the consolidated financial statements and is used to determine the overall profitability of the combined entity.
Formula for Consolidation Net Income
The formula for consolidation net income is as follows:
Consolidation net income = Parent company net income + Subsidiary net income – Intercompany transactions and balances
Examples of Consolidation Net Income
- A parent company owns 80% of the common stock of a subsidiary. The subsidiary has net income of $10 million for the year, and the parent company has net income of $20 million for the year. The parent company and subsidiary have no intercompany transactions or balances. To calculate the consolidation net income, the following calculation would be made:
Consolidation net income = $20 million + $10 million – $0 = $30 million
- A parent company owns 50% of the common stock of a subsidiary, but has the ability to exercise significant influence over the subsidiary’s financial and operating policies. The subsidiary has net income of $10 million for the year, and the parent company has net income of $20 million for the year. The parent company and subsidiary have intercompany transactions totaling $5 million. To calculate the consolidation net income, the following calculation would be made:
Consolidation net income = $20 million + $10 million – $5 million = $25 million
In this example, the consolidation net income is $25 million, which represents the combined net income of the parent company and subsidiary after eliminating the intercompany transactions between the entities.
Importance of Consolidation Net Income
Consolidation net income is an important financial metric for companies that have subsidiaries, as it provides a comprehensive view of the combined financial performance of the parent company and its subsidiaries. It is useful for investors, analysts, and other stakeholders to assess the overall profitability of the consolidated entity and make informed decisions about the company.
In addition, consolidation net income is used by management to track the financial performance of the consolidated entity over time and make any necessary changes to improve profitability. It is also used in financial analysis, such as ratio analysis and trend analysis, to compare the financial performance of the consolidated entity to industry benchmarks or to the company’s own historical performance.