What is Financial Consolidation?

Financial consolidation is an accounting process that allows a company to summarize operating data for all subsidiaries in a single set of financial statements. This procedure also helps investors and regulators understand the full scope of a corporation's activities and ensures that these activities comply with rules, guidelines and requirements applicable to the company.

Simply stated, financial consolidation means regrouping financial data for a company's segments and subsidiaries into a set of accounting records---as if these records were the financial statements of a single company.
  

Function
# Financial statement consolidation serves three purposes. First, it helps regulators review all decisions that a company's top management makes and ensures that these decisions comply with regulations and industry practices. Second, it allows investors to gauge a firm's market share, competitive standing and business performance. Third, it helps a company's top leadership evaluate the economic health of the company and identify nonperforming areas, countries or segments.


Significance
# Financial consolidation is a process that complies with generally accepted accounting principles (GAAP) and SEC requirements. This process is important for two reasons. First, it helps a regulator, such as the U.S. Department of Justice, monitor "monopoly" initiatives from companies in industries, states or sectors ("monopoly" indicates that a single company operates in a market and has no competitor). Second, it helps investors, suppliers and customers understand interrelations between companies. For example, Supplier A may decide to stop selling to Customer B if it finds out that Customer B owns Supplier C, a competitor to Supplier A.

Control Concept
# The control concept explains the level at which a company may consolidate the financial statements of a subsidiary. There are two rules: simple majority ownership and "significant control". Simple majority ownership occurs when an investor owns more than half of a corporation's equity. "Significant control" indicates practical power or influence in decision making and may occur even if an owner has less than 50 percent ownership.


Economic Entity Concept
# The concept of economic entity means that financial consolidation treats all subsidiary activities, processes and policies as if they were part of a single company. All subsidiary financial statements are grouped into a consolidated set of financial statements.