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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 financial accounting, it refers to the consolidation of financial statements so that all subsidiaries report under the umbrella of a parent company.
It can also mean the union of smaller companies into larger companies through mergers and acquisitions (M&A). The consolidated company is often able to realize higher profits and share prices due to the less competitive market landscape.
Key Takeaways
- Consolidation in financial accounting provides a holistic view of a parent company and its subsidiaries by combining their financial statements, thus enabling a comprehensive understanding of the entire organization’s financial health.
- Business consolidation is typically driven by the goal of increasing market share and profitability by merging two or more entities, potentially leading to enhanced capabilities, expertise, or technology.
- Debt consolidation in consumer finance simplifies debt management by combining multiple debts into a single loan, often resulting in lower interest rates and more manageable monthly payments.
- In the realm of technical analysis, consolidation describes a period of stability for a security’s price within a specific range, ending when a significant market event causes a break in the pattern.
- The process of consolidation, whether in financial statements, mergers, or consumer debt, fundamentally aims to streamline and simplify by uniting multiple elements into a single entity or report.
Mira Norian / Investopedia
Financial Consolidation: A Comprehensive Overview
The term “consolidate” originates from the Latin word consolidatus, meaning “to combine into one body.” Generally, consolidating means merging multiple items into one. In finance and accounting, consolidation has a more specific meaning.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 is 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 a parent company controls more than 50% of a subsidiary. Companies with over 20% control can use consolidated accounting, while those with less than 20% must use equity method accounting.
Business Consolidation: Mergers and Amalgamations
In business, consolidation happens when businesses merge to form a new entity, aiming to increase market share and profitability by combining resources and expertise. 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 MinuteClinic. The consolidation was friendly in nature and lessened overall competition in the pharmacy marketplace.
A consolidation results in a new entity, unlike a merger where one company absorbs another, dissolving the other.
Simplifying Consumer Debt through Consolidation
In the consumer market, consolidation means using one loan to pay off multiple debts, creating a single payment point. This transfers the debt owed from multiple creditors, allowing the consumer to have a single point of payment to pay down the total.
Debt consolidation can lead to easier monthly payments and possibly lower interest rates, like converting high-interest credit card debt into a home equity line of credit (HELOC).
Market Consolidation in Technical Analysis
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 in technical analysis to describe the movement of a stock’s price within a well-defined pattern of trading levels.
Consolidation is often seen as a period of indecision, ending when asset prices break the trading pattern due to major news or triggered limit orders. Consolidation is also defined as a set of financial statements that presents a parent and a subsidiary company as one company.
What Is the Impact of Consolidation in Accounting?
Consolidation refers to consolidated financial statements in financial accounting. The 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.
What Is the Impact of Consolidation in Business?
Consolidation in business refers to two or more businesses combining to form one new entity, expecting to increase market share and profitability and benefit from combining talent, industry expertise, or technology.
Where Else Does Consolidation Apply?
Consolidation can refer to using a single loan to pay off multiple consumer debts. It is also used in technical analysis to describe a stock’s price movement within a well-defined pattern of trading levels.
The Bottom Line
Consolidation broadly refers to combining multiple entities into a larger one, whether financial accounts or corporations. In financial accounting, to consolidate is for all subsidiaries to report in financial statements under the umbrella of a parent company.
In business, to consolidate is for smaller companies to unite with larger companies through mergers and acquisitions. This allows the new, larger company to benefit from increased market share and efficiencies because there is less competition for customers.
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