Accounting Consolidation: Obligations, Methods, and Exemptions

Accounting consolidation is a fundamental process in the commercial field that allows the financial position and results of a group of companies to be presented as if they were a single economic entity. With the help of our expert in accounting and taxation, Cristina Vadillo, we explain what accounting consolidation is, when it is mandatory, the most commonly used methods, and the cases in which exemptions may apply.

What is accounting consolidation?

Accounting consolidation is the process by which a parent company presents, together with its subsidiaries, the consolidated annual accounts as if they were a single economic entity. The objective is to provide a true and fair view of the group’s financial position, results, and cash flows.

Who is required to consolidate?

According to Article 42 of the Spanish Commercial Code, a company is required to consolidate when it has, directly or indirectly, control over other entities. This control is presumed when:

• • It holds the majority of voting rights.
  • It can appoint or remove the majority of the members of the management body.
  • It holds such majority through agreements with other shareholders.

• It has appointed the majority of the management body members of the subsidiary exclusively with its votes in the last two financial years.

The consolidated group consists of the parent company and its subsidiaries, and may also include:

• Jointly controlled entities: companies managed jointly by one or more group companies and other external parties.
• Associates: companies in which one or more group entities have significant influence, presumed with 20% or more of the voting rights.

Accounting thresholds for the obligation to consolidate

A company is required to prepare consolidated annual accounts if it exceeds, for two consecutive financial years, at least two of the following three thresholds set out in Article 258 of the Spanish Companies Act:

• Total assets: €11,400,000
• Net turnover: €22,800,000
• Average number of employees: 250

Accounting consolidation methods

The purpose of consolidated financial statements is to present the financial position and performance of a group of entities as if they were a single reporting entity.
To achieve this, the following steps must be followed:

1. Standardisation: Adjusting the balances in the individual accounts to align accounting principles.
2. Aggregation: Adding those balances line by line in a working paper.
3. Elimination: Adjusting the aggregated balances to eliminate the accounting effects of internal transactions between consolidated entities and to account properly for certain third-party operations.

There are three main consolidation methods:

Full consolidation method

• Applies to subsidiaries controlled by the parent company.
• 100% of assets, liabilities, income and expenses are included, regardless of ownership percentage.
• All internal transactions are eliminated.
• The portion of equity attributable to minority interests is presented as “non-controlling interests.”

Proportional consolidation method

• Applies to jointly controlled entities using Spanish accounting standards.
• Financial statements are included only to the extent of the ownership percentage.
• The corresponding portion of internal transactions is eliminated.
• Non-controlling interests are not recognised.

Equity method

• Applies to jointly controlled entities (when reporting under EU-IFRS) and associates.
• Balances of investees are not integrated.
• Transactions with other group members are not eliminated.
• The investment is not eliminated but adjusted instead.
• Non-controlling interests are not recognised in the equity of the investee.

Exemptions to the obligation to consolidate

According to Article 43 of the Spanish Commercial Code, there are several exemptions to the consolidation obligation:

1. Belonging to a subgroup: When the entity required to consolidate is itself a subsidiary of a parent company that already prepares consolidated financial statements and meets certain conditions.
2. Due to size: When the group does not exceed specific thresholds.
3. Exclusion of certain subsidiaries: When the company only holds interests in subsidiaries that are not material for presenting a true and fair view of the group.

✅ If you’d like us to assess your case, request our accounting consultancy services for companies at Adlanter.