Definition
Financial consolidation is the process that combines the financial data of a company's subsidiaries and entities into a single financial statement. Since the parent company would control all of its subsidiaries, the assets, liabilities, income, expenses, equity, and cash flows of the parent company are combined with those of its subsidiaries. Such consolidated data is presented in a single financial statement to reflect the financial performance of a larger legal entity.
Example
An example of financial consolidation would be if company A acquires B, then the combined income statement would not show sales from A to B. However, if company A or B makes sales to another business, such revenues will be included in the consolidated income statement.
Why it matters
Financial consolidation aids both companies as well as stakeholders by offering a complete financial picture of the larger business. Some other benefits are:1. Regulators and auditors use consolidated finances to check compliance. 2. Investors use consolidated financial statements to check financial performance and overall market standing. 3. Stakeholders prefer to review consolidated finances while evaluating aspects like corporate performance, potential risks, etc.