Understanding Consolidation
To consolidate means to combine assets, liabilities, and other financial items of two or more entities into one. In financial accounting, the term consolidation typically refers to the unification of financial statements, where all subsidiaries report under the parent company’s umbrella. Consolidation also encompasses mergers and acquisitions (M&A), where smaller companies merge to create larger entities.
Consolidation: A Comprehensive Overview
- Combining Financial Elements: In financial accounting, consolidation refers to the combination of assets, liabilities, and financials under a single entity.
- Unified Financial Statements: All subsidiaries are consolidated under the parent company’s financial statements.
- Market Consolidation: Smaller firms merge into larger entities through mergers and acquisitions for increased market share and profitability.
How Consolidation Works
The term consolidate derives from the Latin consolidatus, meaning “to combine into one body.” Consolidation in finance and accounting involves merging multiple accounts or businesses into a single entity.
Financial Consolidation
Consolidation involves merging the accounts of various entities into one set of financial statements, providing a comprehensive view of a parent company and its subsidiaries. Information from both is treated as a single entity. Cumulative assets, income, and expenses are recorded on the parent company’s balance sheet and income statement.
When a parent company owns more than 50% of a subsidiary, consolidated accounting is used. Companies with a stake over 20% may also use this method, while those below this threshold must use equity method accounting.
Business Consolidation
Consolidation in business happens when two or more firms merge to form a new entity. This is often aimed at increasing market share, profitability, and leveraging combined talent, industry expertise, or technology. This can result in a new business entity or a subsidiary of a larger firm.
For example, in 2015, Target Corporation sold its pharmacy business to CVS Health. As part of the agreement, CVS rebranded these pharmacies under the MinuteClinic name, reducing competition in the pharmacy market.
Unlike mergers, which result in one company absorbing another, consolidation can lead to an entirely new business entity.
Consumer Debt Consolidation
In consumer finance, consolidation involves taking a single loan to pay off multiple debts. This process transfers multiple debts into one manageable payment point, often resulting in lower monthly payments and possibly reduced overall interest rates.
For example, high-interest credit card debt can be consolidated into a lower-interest home equity line of credit.
Consolidation in Technical Analysis
In trading and technical analysis, consolidation refers to a stock price oscillating within a specific range, generally indicating market indecision. Consolidation ends when the asset’s price moves outside this range, usually triggered by significant news or limit orders.
Moreover, consolidation in terms of financial statements means presenting the parent and subsidiary company data as one entity.
By understanding consolidation, from financial consolidation to business mergers and consumer debt management, you can manage your financial strategies effectively.
Related Terms: amalgamation, equity method accounting, majority stake, parent company, subsidiary.
