- Posted by: sajib
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What does consolidation mean?
Consolidating means merging assets, liabilities and other financial resources from two or more units that will be uniform. In accounting, the term “consolidate” is used to refer to a merger of financial statements when a subsidiary reports to a parent company.
Consolidation also refers to the composition of small companies that become large companies through mergers and acquisitions. Common people often come across this when reading financial news and it is companies like Microsoft or Google that have decided to consolidate smaller companies.
How consolidation works
The term consolidate comes from the Latin “consolidatus” which means “to combine into a single body”. In all contexts, consolidation is about putting together a large number of things into a smaller number. For example, a traveler can consolidate all their luggage into a single large suitcase. In finance and accounting, the term is more specific.
Consolidation in the Financial World
Consolidation revolves around combining the information from multiple accounts or companies and then treating it uniformly. The field of financial accounting offers a consolidated financial overview with a comprehensive view of the financial position in which both the parent company and subsidiaries are, rather than the position of a single company.
In consolidated accounting, the information from the parent company and its subsidiaries is treated as if it came from a single entity. The combined assets of the company, together with any income or expenses, are recorded on the Parent Company’s balance sheet. This information is also reported in the Parent Company’s income statement.
Financial consolidation in accounting
In a vacuum, consolidation just means to put things together. In the accounting world, however, “financial consolidation” is a well-defined and deeply nuanced process.
The vital steps in the consolidation process:
Gather e.g. assets, liabilities, capital, revenues and expense accounts from multiple accounting systems, and then link them to a centralized list of accounts.
Consolidate the data and follow specific rules and guidelines, such as those from the tax authority or the Financial Supervisory Authority.
Report the results to internal and external stakeholders.
Significant financial reports arising from the financial results of consolidation include income statement, balance sheet and also cash flow reports.
It’s more than just addition
For those unfamiliar with consolidation, it may sound like it’s just about putting numbers together. However, that is not enough. In financial consolidation, there are specific calculations and adjustments that must be made when consolidating values from subsidiaries to parent companies. This includes the following:
Conversion of foreign currencies
Abolition of transactions and funds within companies
Adjustments to accounting
Responsibility for co-ownership
There are also different ways to go about consolidation. These methods may vary depending on how large a controlling share a parent company has in a subsidiary. As an example: if the parent company has a controlling share of greater than 50%, consolidated accounting is used. In that case, all the subsidiary’s assets, obligations, income and expenses are combined with the parent company’s financial statements.
In practice, a consolidation differs from a merger in that the consolidated companies may result in a new entity, and a merger means that one company absorbs the other and continues to exist while the other dissolves.