Consolidate

Reviewed by Annapoorna | Updated on Aug 27, 2020

What is meant by to Consolidate?

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 things in one, a smaller amount.

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.

What are Consolidated Financial Statements in India?

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 that 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; and (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; or (b) the subsidiary operates under long-standing extreme restrictions that seriously impair the capacity of the subsidiary to move funds to its parent.

Meaning of Consolidation of Business

Consolidation happens in business when two or more companies merge to form one single company. The goal is to grow market share, competitiveness and the 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, in a merger, one company replaces the other and stays in existence while the other is dissolved.