Group consolidation is the merging of two or more business entities.
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Consolidation can be a formal process of legally combining two businesses, or a method of financial reporting, whereby a group of organisations is treated as a single entity.
Consolidation of businesses
Similar to mergers and acquisitions, consolidation involves the legal combination of two or more companies.
Mergers occur when two distinct companies combine to form a new, larger, single company. The new company is expected to be stronger than either of the two smaller businesses.
Acquisitions occur when a company is absorbed by another. The purchasing company takes control of the target company by purchasing its shares or acquiring its assets. Acquisitions might also be called business acquisitions or takeovers.
Within consolidation, there are two possible outcomes; either:
A new business entity is created and both original companies cease to exist, or;
The acquired business continues to function as a stand-alone business but is legally recognised as a subsidiary of the larger organisation.
Consolidation is usually expected to increase market share, reduce competition and increase profitability by combining resources, technology and industry expertise.
Consolidation of financial statements
If the parent company controls more than 50% of a subsidiary business, it’s usually possible to report the subsidiary's finances under the umbrella of the parent company. This process is known as consolidating financial statements.
Within consolidated financial statements, the total assets, revenues and expenses of the parent company and its subsidiaries are recorded on the parent company’s balance sheet and income statement.
If the subsidiary is based in another country or operates using a different currency, it’s important to translate its financial statements into the currency of the parent company.
Although the parent business and its subsidiaries may operate as individual, stand-alone businesses, when financial statements are consolidated, the parent company and its subsidiaries are treated as a single entity.
Consolidated financial statements therefore give investors, regulators and customers a better overview of the entire entity’s overall financial health.
