The ONLY Consolidation Lesson You Need

So let's talk about these steps here.

So when we talk about combination, what do we combine? So imagine you have a parent And the parent has interest in three subsidiaries, sub one, sub two, and subsidiary number three.

Now, the consolidation process comes into play when we have significant control.

So significant control exists typically when we have more than 50%, 50% plus ownership.

So the parent owns more than 50% of each of the subsidiary.

For our case here, we're going to assume that we have significant control, ownership more than 50%.

Now, that means we're going to have to consolidate.

So consolidation means that we consolidate the books of those entities all together.

Now, combination is because imagine if the parent has $100 and the subsidiary number one has $100 also.

Now, when you combine, that means together they have $200.

And that is fair because the parent has $100, the subsidiary has $100, together they have $200.

And that makes a lot of sense.

Now, imagine if in this case here, the parent lends some money to the subsidiary.

The parent lends to subsidiary number two, $500.

That means that parent here is owed $500.

and we call it AR, it's an intercompany AR, right? And subsidiary owes to the parent $500, right? They have a payable, an intercompany payable, we call it AP, intercompany AP.

So we have here a situation where the parent lends the sub $500.

Now, when you combine, you have to do what we call eliminate.

Why do we eliminate? Because as a combination, as it consolidates the position, together they wash out.

The parent is not owed any money from the outside world, and the sub doesn't owe any money to the outside world.

It's all within the same house, so we have to eliminate these together.

So we talked about combination.

Why do we combine some things? Why do we have to eliminate some of the things? There are some other things that we have to eliminate, and then we have to consolidate When we consolidate, we have to consider whether there is a minority interest.

What is minority interest? Minority interest means if the parent owns, instead of 100%, if the parent owns 90%, interest in one of these shops, that means that there is 10% that is owned by someone else, could be another shareholder, right? So you have to display that on the consolidated financials as something we call NCI, or non controlling interest.