In business, consolidation or mergers is the acquisition and consolidation of several smaller enterprises into a single larger one. In the corporate context, consolidation relates to the consolidation of certain financial accounts of a specific organization as consolidated financial accounts. It includes merging assets and liabilities of different companies and reorganizing businesses as per the needs of the organization.
In financial accounting, consolidation means financial transactions resulting in the conversion of one unit of account to another. The most common example of consolidation is a company that creates a new subsidiary and merges all its operations with the parent company. Consolidation may also occur when two or more companies are absorbed by a parent company.
In some instances, consolidation may occur because the parent company wishes to take control of certain parts of the business or because it is undergoing financial distress. For example, an old and growing corporation may be bought by a new company that seeks to improve its cash flow by reducing costs and streamlining its overall business structure. The same thing may happen with a purchaser purchasing an old manufacturing concern that is inefficient and slowing down its expansion. Or a third party investor may acquire part or all of a business that is doing well enough to be able to obtain credit from other investors. In these situations, consolidation of financial statements takes place.
Consolidation of financial statements, however, is not the only use of consolidation. Merger is another way of describing a consolidation transaction. A merger is a combination of two or more companies of the same size or industry. These transactions are very common, especially in the financial reporting arena, where a small firm can purchase a larger firm and then combine all of its operations in one unit.
In addition, consolidation of financial reports may be due to acquisition. An acquirer acquires certain assets or acquires a minority interest in a company. In either case, the acquirer or minority holder is responsible for transferring the remaining assets or equity to a public or private entity. The term “acquirer” refers to a shareholder, while the word “acquired” refers to an entity that has acquired another entity.
Another way to look at consolidation of financial statement is through the act of merger. Merger is a term used to describe an acquisition or merger between two or more entities, whether the acquiring entity is a new entity or a subsidiary. When consolidation occurs as the result of mergers, all of the outstanding shares of the acquiring entity are converted into common stock of the new entity. When the shares are re-dissolved as a company in the new entity, then the shareholders will own a proportionate percentage of the company.
One of the most common reasons for consolidation of financial statements is the transfer of an operating license from one company to another. For example, when a manufacturing concern transfers its license for the manufacture of a particular product to a subsidiary company, the parent company reports the acquisition of the license in its financial statements. Likewise, if a company decides to purchase a manufacturing concern from a foreign manufacturer, it needs to purchase the entire manufacturing concern, which results in a change in the ownership and control of the parent company. In this case, consolidation is necessary to ensure that all of the financial statements recorded within the firm are consistent. Similarly, when a business partnership is dissolved, the partners report the acquisition of the partnership as a consolidation in their personal or partnership financial statements.
To give you a better understanding on how consolidation works, it is important to first know why debt consolidation loans and credit card balance transfers are popular with businesses. Basically, this method of management allows borrowers to consolidate existing debts into a single monthly payment. This helps reduce the amount of interest paid monthly and increases the ability of the borrower to make payments on time every month. Also, there is no risk of default on the consolidation loan, which is very useful for the borrower.