The concept of consolidation can be categorized in two primary ways, depending on whether the context is business strategy or financial Accounting Services in Buffalo and control.
1. Consolidation Based on Business Strategy
In the context of mergers and acquisitions (M&A), consolidation describes the strategic relationship between the merging companies within the supply chain. The two main types here are Horizontal and Vertical consolidation.
A. Horizontal Consolidation (or Integration)
Definition: This occurs when two or more companies operating in the same industry and at the same stage of the production/distribution process combine. These are typically direct competitors.
Goal: To increase market share, achieve economies of scale (reducing average costs by producing more), and eliminate competition.
Example: A large car manufacturer merges with another large car manufacturer.
B. Vertical Consolidation (or Integration)
Definition: This occurs when two or more companies combine that operate at different, but successive, stages of the production or supply chain.
Goal: To gain control over the entire supply chain, reduce dependency on outside suppliers or distributors, and potentially lower overall production costs.
Example: A car manufacturer acquires a company that produces car tires (a supplier—backward integration) or acquires a chain of dealerships (a distributor—forward integration).
2. Consolidation Based on Financial Control (Accounting)
In financial accounting, consolidation refers to the process of combining the financial statements of a Parent Company and its Subsidiary (or subsidiaries) to present them as a single, unified economic entity. The method of accounting consolidation used depends on the degree of influence or control the Parent has over the other entity.
While modern accounting standards (like GAAP and IFRS) recognize several methods based on specific ownership percentages, the two most fundamental types of financial consolidation are Full Consolidation and The Equity Method.
A. Full Consolidation (Controlling Interest)
When Used: When the Parent Company has a controlling interest in the Subsidiary, which is typically defined as owning more than 50% of the subsidiary's voting stock.
Process: The parent company combines 100% of the subsidiary's assets, liabilities, revenues, and expenses with its own.
Note: If the Parent owns less than 100%, the portion not owned is recorded as a separate line item on the balance sheet called the Non-Controlling Interest (or Minority Interest). The consolidated statements represent the entire combined entity.
B. Equity Method (Significant Influence)
When Used: When the Investor Company has significant influence over the Investee Company, but not control. This is generally defined as owning between 20% and 50% of the investee’s voting stock.
Process: The investor does not combine line-by-line totals. Instead, the investment is reported as a single-line asset on the balance sheet ("Investment in Associate"). The investor company then records its proportionate share of the investee's net income as a Bookkeeping Services Buffalo on its own income statement.
The choice of consolidation method is governed by the rules set forth by bodies like the Financial Accounting Standards Board (FASB) in the U.S. and the International Accounting Standards Board (IASB) globally.