Definition
Consolidation is the process of combining the financial statements of a parent company and the subsidiaries it controls into one set of group statements. Assets, liabilities, income and expenses are added line by line, intercompany items are eliminated, and the result presents the group as if it were a single economic entity.
How it works
Under IFRS 10 a parent consolidates every entity it controls: it has power over the investee, exposure to variable returns from it, and the ability to use that power to affect those returns. Owning more than half of the voting rights is the usual indicator, but control can also come from contracts or potential voting rights.
The mechanics follow a fixed order. Align accounting policies and reporting dates, translate foreign subsidiaries into the presentation currency, add the trial balances together, eliminate the parent's investment against the subsidiary's equity (recognising goodwill and non-controlling interests), then eliminate intercompany balances, transactions and unrealised profit.
Consolidation is only as clean as the books underneath it. Groups that keep each company on the same chart of accounts and record intercompany deals consistently spend far less time on adjustments. Ledgeriano keeps every company's books in one account and can mirror intercompany entries between them, which makes the trial balances easier to combine.
Formula
Group line item = Parent + Subsidiaries - Intercompany eliminations
Goodwill = Consideration + NCI + Fair value of previously held interest - Net identifiable assets
Example: a parent and one wholly owned subsidiary
Parent has receivables of 500,000, including 120,000 owed by its subsidiary. The subsidiary has receivables of 200,000 and payables of 300,000, including the 120,000 owed to the parent.
Consolidated receivables are 500,000 + 200,000 - 120,000 = 580,000. The subsidiary's 120,000 payable to the parent is eliminated as well, so consolidated payables include only amounts owed to outsiders.