In accounting and financial reporting, consolidation refers to merging the individual financial statements of several companies into one consolidated statement, also called a consolidated financial statement.
In this process, the balance sheets, profit and loss accounts and other legally required information of all group companies are combined into one overall financial statement.
Consolidation eliminates intra-group transactions, such as sales of goods or services between group companies. This is to prevent sales, costs and profits from being recorded twice in the consolidated balance sheet.
Consolidation is necessary to provide a comprehensive picture of the economic position and performance of the group as a whole. Consolidated financial statements enable investors, creditors and other interested parties to assess the financial strength of the group and make informed decisions.
The preparation of consolidated financial statements is required by law in many countries, especially for companies that have group structures. The rules for consolidation are set out in national and international accounting standards such as the International Financial Reporting Standards (IFRS) and are subject to regular monitoring by regulatory authorities.
