Are You Really Seeing the Full Picture? Why SMEs Shouldn’t Ignore Consolidated Financial Statements

26 Aug

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The Hidden Blind Spot for SMEs

Many small and medium-sized enterprises (SMEs) believe that group or consolidated financial statements are the domain of large corporates with complex multinational structures. The reality, however, is quite different. A surprising number of SMEs operate in group structures without even realising it — a trading company here, a property company there, sometimes a family trust or even a foreign subsidiary.

Looking only at the financial results of a single entity can be misleading. Without consolidated financials, business owners risk making decisions with only part of the picture, leaving hidden risks and opportunities unaddressed.

When SMEs Are Actually a ‘Group’

You don’t need to be a listed company to have group reporting needs. Many SME structures fall into this category:

Operating + property company: One entity runs the business, another owns the premises.
Family business with a holding company: Common for succession and tax planning.
Cross-border subsidiaries or joint ventures: Local companies often expand or partner abroad.
Investment arms: Separate entities holding shares or other assets.

In these cases, individual sets of accounts provide limited insight. Only by consolidating can owners and accountants see the true combined financial position and performance.

The Value of Consolidated Financial Statements

So why should SMEs bother with consolidation if it’s not legally enforced? The answer lies in the strategic advantages:

Better decision-making: A group view gives clarity on total revenue, profitability, and debt exposure across entities.
Investor and funder readiness: Banks, development finance institutions, and potential investors often require consolidated results before extending credit or equity.
Tax and risk planning: Consolidated statements highlight intra-group loans, double counting, or imbalances that could create tax or cash flow risks.
Succession and sale planning: A buyer or successor needs to see the consolidated health of the enterprise — not just one company in isolation.

A Practical Example

Consider a family-owned SME with two companies:

ABC Trading (Pty) Ltd runs a profitable retail business.

ABC Properties (Pty) Ltd owns the store buildings and carries significant bond liabilities.

Looking only at ABC Trading’s accounts, the owners see strong profits and assume the business is healthy. But once consolidated with ABC Properties, the picture changes: while trading profits are solid, group-level cash flow is strained due to loan repayments, and the group’s debt-to-equity ratio is much higher than expected.

Without consolidated statements, the family would never have seen the financial strain across the group. With consolidation, they can restructure loans and plan more effectively for expansion.

Challenges SMEs Face

Of course, consolidation is not without its hurdles:

Multiple accounting systems: Subsidiaries may use different software or reporting templates.
Inconsistent policies: One entity depreciates vehicles over five years, another over seven.
Intercompany balances: Loans, dividends, or stock transfers between entities can complicate elimination.

The good news? These challenges can be managed with proper planning, standardisation, and professional guidance. For accountants in practice, this is a powerful opportunity to step in and add value.

Regulatory Context: Compliance vs Strategy

Under Section 9 of the IFRS for SMEs, a parent entity that is itself a subsidiary may be exempt from preparing consolidated financial statements, if:

The entity qualifies as an SME (i.e., no public accountability, external users).
Consolidated financial statements are prepared by the ultimate parent (for group reporting).
The decision to not consolidate is approved by the entity’s shareholders.

The IFRS for SMEs framework sets out when consolidated financials are required — typically when an SME controls one or more subsidiaries. However, even when not strictly required, consolidated statements can be strategically valuable.

This exemption is not a loophole—it's a choice that demands careful consideration, full transparency, and proper governance.

It’s also worth noting that certain regulators, banks, or even SARS may request consolidated information when reviewing tax structures, funding applications, or compliance reports. Being proactive ensures SMEs are never caught off-guard.

How to Get Started with Consolidation

For SMEs considering consolidated financials, the process doesn’t have to be intimidating. A simple roadmap includes:

Identify all entities: Subsidiaries, associates, joint ventures, trusts, and investment companies.
Align accounting policies: Ensure all entities use the same bases for recognition and measurement.
Eliminate intercompany balances: Loans, dividends, and intercompany transactions need to be cancelled out.
Prepare consolidated results: Present combined statements of financial position and performance.
Leverage technology and expertise: Many accounting systems support group reporting, or members can provide consolidation services.

The Accountant’s Role: From Compliance to Trusted Advisor

For CIBA members, consolidation—whether exercised or exempted—is a strategic conversation starter.

Rather than waiting for clients, ask:

“Are you aware that, under IFRS for SMEs, you might be exempt from consolidation—but have you considered what your group's overall financial picture really shows?”

This positions accountants as forward-looking partners who help SMEs understand their group dynamics, manage risks, and prepare for growth. It also opens the door to new service lines — from consolidation support to strategic advisory — expanding revenue opportunities for practices.

5 Signs Your SME May Need Consolidated Financials

Conclusion: Seeing the Full Picture

At the end of the day, financial statements are about more than compliance. They are tools for decision-making, growth, and sustainability. For SMEs with multiple entities, consolidated financial statements are the only way to truly see the full picture.

By guiding clients through this process, CIBA members can help them reduce blind spots, unlock opportunities, and future-proof their businesses. After all, what you don’t see can hurt you — and what you consolidate can move you forward.

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