Group consolidation – What is group consolidation?
Group consolidation is the merging of two or more business entities.
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Consolidation can be a formal process of legally combining businesses, or a method of financial reporting whereby a group of organisations is treated as a single entity.
Consolidation of businesses
Consolidation occurs when two or more organisations are legally combined, resulting in an entirely new business entity or creating a new subsidiary within an existing organisation.
Though similar, consolidation is not the same as a merger. A merger occurs when a smaller company is absorbed by a larger business, resulting in the dissolution of the smaller organisation. Within consolidation, either a new entity is created and both original businesses 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; or increase profitability by combining resources, technology, and industry expertise.
Consolidation of financial statements
If parent company controls more than 50% of a subsidiary business, it is usually possible to report the subsidiaries’ finances under the umbrella of the parent company. This process is known as consolidating financial statements.
If the subsidiary is based in another country or operates using a different currency, it is important to translate their 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 single entity. Consolidated financial statements therefore give investors, regulators or customers a better overview of the entire entity’s overall financial health.