Reviewed by Oct 05, 2020| Updated on
Consolidate (or consolidating) is to merge two or more entities, assets, liabilities, and other financial items into one. The term “consolidate” also applies in financial accounting to mean the restructuring of financial statements under which all companies report under the umbrella of a parent organisation.
Consolidation also applies to mergers and acquisitions (M&A) that unify smaller companies into more substantial corporations.
The word consolidate comes from the Latin consolidatus, which means “to merge into one body”. In any given context, consolidating refers to bringing together several more significant amounts of items in one.
A traveller can, for example, combine all their luggage into a single, larger bag. The restructuring has a more broad background in banking and accounting.
The accounting standards in India define specific rules to prepare consolidated financial statements. It is issued by the Institute of Chartered Accountants of India. AS 21, on consolidated financial statements, is used to prepare and present consolidated financial statements for a group of enterprises under the single control of a parent company.
These statements must be made by a parent company that is reporting its consolidated financial statements together with its separate financial statements.
Users of a parent company’s financial statements usually are concerned with the results of operations and financial status not only of that company but also of the subsidiary organisation. They are expected to be informed about it.
Their requirement is fulfilled by providing the following to the users of financial statements:
(a) a parent’s standalone financial statements (b) consolidated financial statements that provide financial details about the business group as a single entity without giving regards to any legal constraints of the separate legal entities
A subsidiary must be excluded from consolidation if:
(a) power is intended to be temporary because the subsidiary was purchased and retained primarily for disposal in the immediate future (b) the subsidiary operates under long-standing extreme restrictions that seriously impair the capacity of the subsidiary to move funds to its parent
Consolidation happens in business when two or more companies merge to form one single company. The goal is to grow market share and competitiveness and take advantage of integrating resources, industry experience, or technology.
Consolidation, also known as amalgamation, may lead to the formation of an entirely new corporate organisation or a subsidiary of a larger company.
In practical terms, consolidation differs from a merger in that the merged entities will also lead to a new company. In contrast, one company replaces the other and stays in existence while the other is dissolved in a merger.