What Is Consolidation?
Let me explain consolidation to you directly. In technical analysis, it's when an asset's price bounces back and forth between clear support and resistance levels, showing that the market can't make up its mind. This phase ends when the price finally pushes above or below those levels.
On the accounting side, consolidation means putting together financial statements that treat a parent company and its subsidiaries as if they're one single operation.
Key Takeaways
You need to know that in technical analysis, consolidation describes a stock's price staying within a support and resistance range for some time, usually because traders are undecided. This pattern can break due to big news releases or a chain of limit orders firing off. In accounting, consolidated statements let analysts look at parent and subsidiary companies as one unit.
Understanding Consolidation
You'll find consolidation periods on price charts no matter the time frame, and they can drag on for days, weeks, or even months. As a technical trader, I look for those support and resistance levels to decide when to buy or sell. The pattern breaks for reasons like important news hitting the wires or a series of limit orders getting triggered.
Support vs. Resistance
In a consolidation pattern, the asset's price is boxed in by support at the bottom and resistance at the top. Support is where the price stops falling, and resistance is where it stops rising.
When the price breaks through support or resistance, volatility spikes, creating chances for short-term profits. If it breaks above resistance, traders buy expecting more upside; if below support, they sell anticipating a drop.
Accounting Consolidation
Switching to accounting, consolidated financial statements show a parent and its subsidiary as one company. The parent might own most of the subsidiary, with a non-controlling interest holding the rest, or it could own it all outright.
To make these statements, you adjust the subsidiary's assets and liabilities to fair market value and use those in the combined reports. If the parent and any non-controlling interest pay more than fair value for the net assets, that extra goes to a goodwill account, which gets expensed over time.
Consolidation wipes out any deals between the parent and subsidiary or with the non-controlling interest. The final statements only show transactions with outsiders, and each company still keeps its own separate books.
Example of Accounting Consolidation
Take this example: Suppose XYZ Corp. buys 100% of ABC Manufacturing's net assets for $1 million, but the fair market value is only $700,000. In the consolidated statements, ABC's net assets show up at $700,000, and the $300,000 overpayment lands in a goodwill asset account.
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