A consolidation of financial accounts is a financial reporting technique that helps a firm summarize all operating data under a single set of financial statements in accordance with industry standards, accounting principles and regulations. This technique covers all subsidiaries, segments and areas of which a corporation owns more than 50 percent.
What is Account Consolidation?
Account consolidation is a financial accounting and reporting process that helps a company's top management, investors and regulators understand the economic standing of the company and its affiliates. This process covers all four corporate financial statements—balance sheet, statement of income, statement of cash flows and statement of retained earnings. For example, a company may consolidate the balance sheets of all affiliates into a single balance sheet.
A consolidation accountant works with all segment accounting departments to evaluate operating data, identify trends in business performance and build a consolidation worksheet at the end of the month. Account consolidation typically is part of the month-end accounting close process. For example, a consolidation accountant at a N.J.-based pharmaceutical company may ask country finance managers in France, Germany and Brazil to provide financial statements to be consolidated with the U.S. operating data.
An accounting consolidation process is critical in financial reporting because it gives investors, regulators and trade partners (e.g., suppliers, lenders or customers) appropriate information to assess a corporation's true financial status. For example, if a corporation's compliance department employees cannot completely identify the company's areas of operation and its financial position at any given point in time, they may not know all regulations and laws with which it must comply.
The control concept in an accounting consolidation process requires a company's financial statements to be consolidated with all entities, subsidiaries and segments of which the company owns more than 50 percent. For example, if Company A invests $150 million in Company B, and Company B's total equity is $200 million, then Company A's 75 percent equity in Company B gives Company A control over Company B. This scenario also makes Company B a subsidiary of Company A, and both companies' financial statements are consolidated.
Economic Entity Concept
The economic entity concept in an accounting consolidation process refers to the idea that a company that owns more than 50 percent of another company can control its operations, management structure and strategic activities. Consequently, a controlling company must consolidate all subsidiaries into a single entity. For example, building on the prior example, Company A and Company B are in fact part of a single economic entity because top management at Company A controls Company B's managers and operating activities.