What Is the Implication of Consolidation in Accounting?

A company must consolidate the operating results of subsidiaries.

Consolidation accounting and reporting procedures help a company present the activities of its subsidiaries in a single set of financial reports. Consolidated financial statements present a more accurate picture of a company's financial performance.

Definition

Consolidation is an accounting practice that allows a firm to combine the financial reports of all subsidiaries and entities on which it exerts significant influence. The company has significant influence over a subsidiary if it owns more than 50 percent of the subsidiary's equity capital.

Implication

To present consolidated financial statements, an accountant combines subsidiaries' operating data summaries at the end of each quarter or year. These summaries include balance sheets (or statements of financial condition), statements of profit and loss (also known as statements of income), statements of cash flows and statements of retained earnings.

Other Considerations

A company often has significant influence over another firm if it owns less than 50 percent of the firm's equity. For instance, Company A owns 10 percent of Company B's equity. Company A is the largest shareholder in Company B. In this case, Company A may have significant influence over Company B and may consolidate financial accounts.

References

• United States General Accounting Office: Mandated Study on Consolidation and Competition
• Counterparty Risk Management Policy Group: Standards for Accounting Consolidation