Consolidation

Consolidation

Consolidation is the process of combining smaller accounting units into a single set of financial statements. It is commonly used when a company controls a majority of another company, known as a subsidiary.

Types of Consolidation:

• Full consolidation: Involves combining all assets, liabilities, and equity of the subsidiary with the parent company’s financial statements.
• Partial consolidation: Involves consolidating only certain assets and liabilities of the subsidiary, such as consolidated current assets or consolidated current liabilities.
• Separate financial statements: Each subsidiary maintains its own separate financial statements, which are not consolidated with the parent company’s statements.

Reasons for Consolidation:

• Control: When a company controls a majority of another company, it may consolidate the subsidiary’s financial statements to present a single set of financial statements for the combined entity.
• Financial reporting consistency: Consolidation allows for more consistent financial reporting across different companies within the same parent company.
• Accounting simplicity: Consolidation can simplify accounting procedures by reducing the need for separate financial statements for each subsidiary.

Consolidation Procedures:

1. Identify subsidiaries: Determine which subsidiaries are required to be consolidated based on control and ownership.
2. Prepare consolidated financial statements: Combine the financial statements of the subsidiary with the parent company’s statements, making necessary adjustments for consolidation.
3. Eliminate intra-company transactions: Eliminate any transactions between the parent and subsidiary to prevent double counting.
4. Disclose consolidation methods: Disclose the consolidation method used and any significant accounting policies applied.

Examples:

• A parent company owns 80% of a subsidiary. The parent company consolidates the subsidiary’s financial statements and reports them as part of its own financial statements.
• A company has two subsidiaries. It may choose to consolidate the subsidiaries’ financial statements for a more consolidated view of its overall financial position.

Note: Consolidation is a complex accounting process that requires careful consideration of the applicable accounting standards. It is important to consult with an accountant for guidance on consolidation procedures and requirements.