Think of a business group like Reliance Industries owning Jio, Reliance Retail, and several other companies. As an investor or banker, you want to see the combined financial picture of the whole group — not just the parent company's standalone numbers. That combined view is exactly what Consolidated Financial Statements (CFS) provide: all group entities treated as a single economic unit.
AS 21 governs how a parent company prepares CFS. The trigger is control — owning more than 50% of voting power in another company (the subsidiary), OR having the power to govern its financial and operating policies. Once you establish the parent-subsidiary relationship, you consolidate using the line-by-line method: add every asset, liability, income, and expense of the subsidiary to the parent's figures. Then eliminate intra-group transactions — sales, loans, or dividends between group companies — because they're internal flows that would otherwise double-count. The exam loves testing this elimination, especially unrealised profit sitting in closing stock.
Since the parent rarely owns 100%, the remaining shareholders are called Minority Interest (MI). AS 21 requires MI to be shown separately in the consolidated balance sheet (between liabilities and share capital) and the MI's share of profit/loss is separately disclosed in the P&L. On the date of first consolidation, compare the cost of investment (what the parent paid) with the parent's share of net assets of the subsidiary at the acquisition date (not current date). If cost exceeds the share → Goodwill on Consolidation (intangible asset). If share of net assets exceeds cost → Capital Reserve. This calculation is the most frequently tested numerical in this topic — expect it as a 6–8 mark problem. Also remember: all group companies must use uniform accounting policies before consolidating; adjust the subsidiary's figures if they differ. A subsidiary can be excluded from consolidation if control is temporary (held for sale within 12 months) or if severe long-term restrictions impair control — a common 2-mark theory question.