By: Diana Tunijeva
03 Nov 2026 9 min read
The year-end is approaching. Companies are finalising their forecasts, preparing for stocktakes and planning their annual financial reporting. Finance managers have their hands full. But has anyone checked whether the company also needs to prepare consolidated financial statements this year?
Having a subsidiary does not automatically mean that a company must prepare consolidated financial statements. Some companies consolidate every year, even though the law allows them to apply an exemption. Others do not consolidate, unaware that their circumstances require a more detailed assessment.
The most unwelcome surprise may come after the reporting date, perhaps in February. The financial statements are almost ready, the scope of the audit has been agreed, but correcting an error identified during the audit changes the group's financial figures. Does the entire reporting plan now need to be revised? To avoid this situation, it is worth assessing the need for consolidation before the year-end.
In this article, we take a closer look at the questions that most frequently arise when assessing consolidation requirements.
If a company has a subsidiary, the first step is to determine whether it qualifies as a consolidating entity and whether it is required to prepare consolidated annual financial statements. These requirements are governed by Sections 27 and 28 of the Estonian Accounting Act.
The next step is to check whether the company qualifies for any of the exemptions provided in Section 29 of the Accounting Act. Sometimes, checking the size of the group is sufficient. In other cases, it is necessary to assess intragroup transactions, the size of subsidiaries relative to the parent company, or the financial reporting arrangements of a higher-level parent company.
The good news is that not every company with subsidiaries is required to prepare consolidated annual financial statements. Section 29(2) of the Accounting Act exempts small consolidation groups from this obligation, provided that the statutory conditions are met.
But what exactly qualifies as a small consolidation group under the law?
According to Section 3(18) of the Accounting Act, the size of a group is assessed using three criteria:
To qualify as a small consolidation group, no more than one of these three thresholds may be exceeded.
For example, suppose a group has total assets of EUR 12 million, forecast annual revenue of EUR 10 million and an average of 35 employees. Although the asset threshold is exceeded, the other two indicators remain within their respective limits. Based on these figures, the group qualifies as a small consolidation group and may apply the consolidation exemption, provided that no other restrictions apply.
Suppose that, in August, the company's forecast still indicates annual revenue of EUR 10 million. However, a major project may be completed in the fourth quarter, or sales may be higher than usual. As a result, annual revenue could exceed EUR 15 million. In this case, two thresholds would be exceeded: total assets and revenue.
The need for consolidation must then be reassessed, including whether the company qualifies for another statutory exemption. This is why it is advisable to forecast the group's financial figures before the year-end, taking into account the potential impact of transactions and adjusting entries.
Yes, in certain circumstances. An initial assessment does not necessarily require a full consolidation calculation, including the elimination of intragroup transactions and balances.
Section 29(1) of the Accounting Act allows the exemption to be assessed without making eliminations. In such cases, the law permits the use of thresholds for total assets and net turnover that are 20% higher than the standard limits.
Total assets: EUR 7.5 million × 20% = EUR 1.5 million. The combined assets of the parent company and its subsidiaries, before eliminations, may therefore amount to EUR 9 million.
Net turnover: EUR 15 million × 20% = EUR 3 million. The combined net turnover of the parent company and its subsidiaries, before eliminations, may therefore amount to EUR 18 million.
Consider an example. Before eliminating intragroup transactions, the parent company and its subsidiary have combined assets of EUR 8 million and net turnover of EUR 16 million. Although both figures exceed the standard thresholds for a small consolidation group referred to in Section 29(2) of the Accounting Act, they remain within the thresholds increased by 20% under Section 29(1).
Provided that no other statutory restrictions apply, the company may use the exemption under Section 29(1). A full consolidation calculation is therefore not required solely to assess eligibility for the exemption.
However, this exemption does not apply if the parent company or any entity included in the consolidation is a public-interest entity within the meaning of Section 13 of the Estonian Auditors Activities Act (Section 29(3) of the Accounting Act).
Sometimes, a subsidiary's operations are so small relative to those of the parent company that the law permits an exemption from consolidation regardless of the overall size of the group.
Section 29(4) of the Accounting Act allows an exemption if the combined total assets of the subsidiaries do not exceed 5% of the parent company's total assets and their combined sales revenue does not exceed 5% of the parent company's sales revenue. Both conditions must be met.
Consider an example. The parent company has total assets of EUR 9 million, sales revenue of EUR 18 million and an average of 60 employees. Its subsidiary has total assets of EUR 400,000 and sales revenue of EUR 800,000.
The subsidiary's share of the parent company's figures is calculated as follows:
Both figures are below the 5% threshold. Therefore, in this example, the parent company can apply the exemption under Section 29(4) of the Accounting Act and is not required to prepare consolidated annual financial statements.
Although the group's total assets, sales revenue and number of employees exceed the thresholds for a small consolidation group, the 5% exemption may still apply. If the company has several subsidiaries, their figures must be assessed together.
It is also worth checking whether the company belongs to a higher-level consolidation group. Under certain conditions, Sections 29(5) and 29(6) of the Accounting Act allow a company to be exempted from preparing separate consolidated financial statements if a higher-level parent company prepares and publishes duly audited consolidated financial statements and the other conditions for the exemption are met.
Suppose management has decided not to prepare consolidated financial statements and has agreed with the auditor that only the parent company's financial statements will be audited.
For example, in February, the auditor identifies a material unrecorded transaction or an error in assessing the recoverable amount or revaluation of property, plant and equipment. Correcting the error changes the group's total assets or annual sales revenue, revealing that the initial assessment of the consolidation requirement was based on incorrect information.
In this situation, management must correct the errors. The group's financial figures must then be recalculated, and the conditions for applying the consolidation exemptions must be reassessed.
If consolidation proves to be mandatory, the company may need to obtain additional financial information from its subsidiary, prepare consolidation entries and eliminate intragroup balances and transactions. The auditor must also assess the impact on the scope, workload and timetable of the audit.
If the parent company already had a subsidiary in 2025 but applied a consolidation exemption that year, its 2026 consolidated financial statements will generally also need to include consolidated comparative figures for 2025.
Section 22 of the Accounting Act requires comparable figures for the current and previous financial years. It also provides for the restatement of figures where changes in presentation or accounting policies make the information non-comparable.
This means that the information required for consolidation must also be collected, and consolidation entries prepared, for the comparative period. Consequently, a consolidation requirement identified only during the audit may result in considerably more work than initially expected.
If financial statements required by law are not prepared, the auditor must assess the impact on the financial statements.
A material but not pervasive misstatement may result in a qualified audit opinion. If the misstatement is both material and pervasive, the auditor may issue an adverse opinion.
The issue is therefore not simply a matter of additional work or a higher audit fee. Financial statements that do not comply with statutory requirements may also affect the auditor's opinion, which is relied upon by banks, investors and other users of financial statements.
The best time to address consolidation requirements is before the year-end
It is advisable to assess the need for consolidation before the end of the financial year, particularly if the company has a subsidiary and at least one of the group's financial indicators is approaching or has already exceeded the relevant threshold.
We recommend carrying out an initial assessment by November at the latest. This should include:
In November, there is still time to collect the necessary information, plan consolidation entries and adjust the audit timetable if needed. After the reporting date, the same issue may lead to unexpected costs, additional work and delays in finalising the financial statements.
Assessing consolidation requirements in good time therefore helps companies avoid both unnecessary consolidation and situations where the entire financial reporting plan must be revised during the audit.
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