The world of business and finance is vast and there are many terms that go around in these fields on a daily basis that are important in many aspects. These terms can sometimes prove to be very confusing for someone who is new to these fields and therefore understanding them beforehand becomes very important. One such term is ‘consolidate’ or consolidation. This word is very important and useful in financial accounting and plays a major role in restructuring the financial statements. To understand this term better and to know its importance in the finance and business industries, let's go through the basics of this term and look at it in a little more detail.
What is Consolidate or Consolidation?
Consolidate or consolidating refers to the merging of two or more financial items, assets, liabilities or other entities into one. The term consolidating is also applied in financial accounting for restructuring the financial statements. This restructuring helps all the companies to display their financial statements and report under one parent organization.
Another important application of the term consolidation is to the Mergers and acquisitions or M&A through which the small companies are merged with the large organizations. So in simple terms you can say that to consolidate is to bring together and merge one or more items together. This can be understood better by a simple example of organizing all your important documents into one file or arranging all your luggage in one bag.
This restructuring or consolidation has an important role to play both in business and accounting. As discussed above, financial statements of the companies are restructured or consolidated and reported under one organisation. These consolidated financial statements are used by analysts to determine or evaluate the parent company as well as all the small companies associated with it as a single large organisation.
When it comes to trading in the stock market, consolidation is a term which is used in the technical analysis which is used to describe the price movement of a stock within a given support and resistance range for a specific period of time. This can also be termed as oscillating between a well-defined pattern of trading levels. As long as trading is concerned, consolidation is interpreted as indecisiveness in the market which ends when the asset’s price moves above or below the trading pattern. This consolidation pattern in trading can be broken with regards to many reasons like the release of materially important news or when the succession limit orders are triggered in the market.
The whole of the above discussion tells us that the word consolidate or consolidation has different meanings in different fields. While the term as a whole entails merging of two or more entities, it has a slightly different meaning in the world of trading. By keeping the basic definition and nature of the term in mind, we will see how this term is important by taking a look at the broad background it has in the world of banking, accounting and business.
Consolidated Financial Statements in India
A certain set of rules is issued by the Institute of Chartered Accountants of India regarding the preparation of the consolidated financial statements which are defined by the accounting standards of the country. AS 21 on the consolidated financial statements is used to prepare such restructured and consolidated financial statements by merging the financial statements of a small group of companies under one large parent organisation and presenting these merged or consolidated financial statements under the parent company or organisation.
Such consolidated statements are to be made and reported by the parent organisation along with its separate financial statements. Presenting both these financial statements gives the users an idea about the operations and financial status of not just the parent company but also its subsidiary companies. This reflects the performance of the small as well as the large company as one whole organization. Therefore, the users of the financial statements have every right to be informed about the consolidated financial statements by the parent company.
The users of the financial statements will be satisfied on being provided with the parent company’s standalone financial statements along with the consolidated financial statements that give them the details about the financial status of the business group as a single entity without any regards to the separate legal entities which may cause or lead to legal restraint.
In certain cases a subsidiary company can be excluded from the consolidation; this happens if the subsidiary had only a temporary power in the organisation and was purchased by the parent company only to be sold in the near future. Another case in which a subsidiary can be excluded from the consolidation is when a subsidiary operates under extreme restrictions for a longer period of time which can impair the capacity of the subsidiary to move funds to its parent company.
What does Consolidation of Business mean?
When two or more than two business companies merge together to form one large business company or organisation, you can consider it as a consolidation of business. This is one quite often by many small as well as large companies with an aim to increase the market share and competitiveness. The companies can also take advantage of each other’s integrating sources, industry experience and technology. For instance, it might happen that one of the companies has spent more years in the industry and therefore has more experience while the other company has all the latest technology which helps them to carry out all their business activities smoothly. When such companies are consolidated the new company can take advantage of the old company’s experience while the old company can take advantage of the new company’s latest technology. This consolidation of business can result in the formation of a completely new organization or a subsidiary of the parent organisation.
It is important to note that consolidation of a business is different from a merger. A consolidation of two or more companies leads to the formation of a new company, whereas in a merger one company replaces the other and stays in power while the other company is completely dissolved.