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The Financial Statements



Finally, the last section of the AR contains the financial statements of the company. As you would agree, the financial statements are perhaps one of the most important aspects of an Annual Report. There are three financial statements that the company will present namely:

The Profit and Loss statement
The Balance Sheet and
The Cash flow statement
We will understand each of these statements in detail over the next few chapters. However at this stage it is important to understand that the financial statements come in two forms.

Standalone financial statement or simply standalone numbers and
Consolidated financial statement or simply consolidated numbers
To understand the difference between standalone and consolidated numbers, we need to understand the structure of a company.

Typically, a well established company has many subsidiaries. These companies also act as a holding company for several other well established companies. To help you understand this better, I have taken the example of CRISIL Limited’s shareholding structure. You can find the same in CRISIL’s annual report. As you may know, CRISIL is an Indian company with a major focus on corporate credit rating services.



As you can see in the above share holding structure:

Standard & Poor’s (S&P), a US based rating agency holds a 51% stake in CRISIL. Hence S&P is the ‘Holding company’ or the ‘Promoter’ of CRISIL
The balance 49% of shares of CRISIL is held by Public and other Financial institutions
However, S&P itself is 100% subsidiary of another company called ‘The McGraw-Hill Companies’
This means McGraw Hill fully owns S&P, and S&P owns 51% of CRISIL
Further, CRISIL itself fully owns (100% shareholding) another company called ‘Irevna’.
Keeping the above in perspective, think about this hypothetical situation. Assume, for the financial year 2014, CRISIL makes a loss of Rs.1000 Crs and Irevna, its 100% subsidiary makes a profit of Rs.700 Crs. What do you would be the overall profitability of CRISIL?

Well, this is quite simple – CRISIL on its own made a loss of Rs.1000 Crs, but its subsidiary Irevna made a profit of Rs.700 Crs, hence the overall P&L of CRISIL is (Rs.1000 Crs) + Rs.700 Crs = (Rs.300 Crs).

Thanks to its subsidiary, CRISIL’s loss is reduced to Rs.300 Crs as opposed to a massive loss of Rs.1000 Crs. Another way to look at it is, CRISIL on a standalone basis made a loss of Rs.1000 Crs, but on a consolidated basis made a loss of Rs.300 Crs.

Hence, Standalone Financial statements represent the standalone numbers/ financials of the company itself and do not include the financials of its subsidiaries. However the consolidated numbers includes the companies (i.e.standalone financials)  and its subsidiaries financial statements.

I personally prefer to look through the consolidated financial statements as it gives a better representation of the company’s financial position.




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