In general, it refers to the process of combining assets, liabilities, and other financial items/ balances of two or more entities together for whatever purpose. In financial accounting, it reflects the combination of financial statements of an entity’s subsidiaries with its financial statements. For consolidation to take place, the subsidiaries have to report under a parent company.

Consolidation involves multiple steps: 1) combination of like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries, 2) offsetting the carrying amount of the parent’s interest in each subsidiary and the parent’s respective equity in each subsidiary, and 3) complete elimination of intragroup assets and liabilities, equity, income, expenses and cash flows pertaining to transactions executed between subsidiaries themselves, and subsidiaries and their parent.

Typically, control is the basis for consolidation- that is, consolidation will be carried out if a parent has control over other companies (the subsidiaries). A parent records the income and expenses of a subsidiary in the consolidated financial statements from the date it acquires control until the date when the subsidiary is no more in its control.