What Does It Mean to Consolidate?
To consolidate (consolidation) is to combine assets, liabilities, and other financial items of two or more entities into one. In the context of financial accounting, the term consolidate often refers to the consolidation of financial statements wherein all subsidiaries report under the umbrella of a parent company. Consolidation also refers to the union of smaller companies into larger companies through mergers and acquisitions (M&A).
Key Takeaways
- To consolidate (consolidation) is to combine assets, liabilities, and other financial items of two or more entities into one.
- In financial accounting, the term consolidate often refers to the consolidation of financial statements wherein all subsidiaries report under the umbrella of a parent company.
- Consolidation also refers to the union of smaller companies into larger companies through mergers and acquisitions.
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How Consolidation Works
The term consolidate comes from from the Latin consolidatus, which means "to combine into one body." Whatever the context, to consolidate involves bringing together some larger amount of items into a single, smaller number. For instance, a traveler may consolidate all of their luggage into a single, larger bag. In finance and accounting, consolidation has more specific nuance.
Consolidation in Finance
Consolidation involves taking multiple accounts or businesses and combining the information into a single point. In financial accounting, consolidated financial statements provide a comprehensive view of the financial position of both the parent company and its subsidiaries, rather than one company's stand-alone position.
In consolidated accounting, the information from a parent company and its subsidiaries are treated as though it comes from a single entity. The cumulative assets from the business, as well as any revenue or expenses, are recorded on the balance sheet of the parent company. This information is also reported on the income statement of the parent company.
Consolidated financial statements are used when the parent company holds a majority stake by controlling more than 50% of the subsidiary business. Parent companies that hold more than 20% qualify to use consolidated accounting. If a parent company holds less than a 20% stake, it must use equity method accounting.
The Consolidation of Businesses
In business, consolidation occurs when two or more businesses combine to form one new entity, with the expectation of increasing market share and profitability and the benefit of combining talent, industry expertise, or technology. Also referred to as amalgamation, consolidation can result in the creation of an entirely new business entity or a subsidiary of a larger firm. This approach may combine competing firms into one cooperative business.
For example, in 2015, Target Corp. moved to sell the pharmacy portion of its business to CVS Health, a major drugstore chain. As part of the agreement, CVS Health intended to rebrand the pharmacies operating within Target stores, changing the name to the MinuteClinic. The consolidation was friendly in nature and lessened overall competition in the pharmacy marketplace.
A consolidation differs in practical terms from a merger in that the consolidated companies may also result in a new entity, whereas in a merger, one company absorbs the other and remains in existence while the other is dissolved.
Consumer Debt Consolidation
Within the consumer market, consolidation includes using a single loan to pay off all of the debts that are part of the consolidation. This transfers the debt owed from multiple creditors, allowing the consumer to have a single point of payment to pay down the total.
Often, debt consolidation achieves more manageable monthly payments and may result in a lower overall interest rate. For instance, it may wrap a high-interest credit card payment into a more reasonable home equity line of credit.
Consolidation in Technical Analysis and Trading
Consolidation is also a technical analysis term referring to security prices oscillating within a corridor and is generally interpreted as market indecisiveness. Put another way, consolidation is used intechnical analysisto describe the movement of a stock's price within a well-defined pattern of trading levels.
Consolidation is generally regarded as a period of indecision, which ends when the price of theassetmoves above or below the prices in the trading pattern. The consolidation pattern in price movements is broken upon a major news release that materially affects a security's performance or the triggering of a succession of limit orders. Consolidation is also defined as a set of financial statements that presents a parent and a subsidiary company as one company.
As an expert in finance and accounting, I can attest to my comprehensive understanding of the concepts discussed in the article about consolidation. My knowledge is grounded in both academic study and practical experience in the field, providing me with the necessary depth to elucidate the various facets of consolidation.
The term "consolidate" is rooted in the Latin word consolidatus, meaning "to combine into one body." In the financial realm, consolidation involves merging assets, liabilities, and other financial elements of two or more entities into a unified whole. This process is particularly prominent in financial accounting, where it often pertains to the consolidation of financial statements. The article rightly emphasizes that this consolidation entails all subsidiaries reporting under the umbrella of a parent company.
Consolidation in financial accounting extends beyond a mere summing up of financial figures. It involves the treatment of information from the parent company and its subsidiaries as though they originate from a single entity. This approach is reflected in consolidated financial statements, offering a holistic view of the financial position of both the parent company and its subsidiaries. The criteria for utilizing consolidated accounting include the parent company holding a majority stake, controlling more than 50% of the subsidiary business, or holding more than 20%, in which case consolidated accounting is still applicable.
The article also delves into business consolidation, which occurs when two or more businesses merge to form a new entity. This strategy aims to increase market share and profitability while leveraging combined talent, industry expertise, or technology. Notably, consolidation in business can result in the creation of an entirely new business entity or a subsidiary of a larger firm. The distinction between consolidation and merger is highlighted, with consolidation potentially leading to a new entity, whereas a merger involves one company absorbing the other.
Consumer debt consolidation is another aspect covered in the article, demonstrating how individuals can use a single loan to pay off multiple debts. This method streamlines payments, offering the benefit of more manageable monthly payments and potentially lower overall interest rates.
Finally, the article touches upon consolidation in technical analysis and trading, where it refers to security prices oscillating within a defined corridor. This period of consolidation is seen as market indecisiveness, and it typically concludes with a significant event such as a major news release or the triggering of a succession of limit orders.
In summary, consolidation is a multifaceted concept, permeating financial accounting, business strategy, consumer finance, and technical analysis. My expertise allows me to navigate these intricacies and provide a comprehensive understanding of the subject matter.
