Consolidation in technical analysis indicates when an asset moves within a clearly defined pattern of trading levels. It typically reflects market indecision and concludes when the asset’s price breaks out above or below the established trading pattern. In financial accounting, consolidation involves presenting a parent and subsidiary company as a single entity through a set of statements.
Understanding Consolidation
Consolidation phases are observable across various timeframes in price charts, enduring for days, weeks, or even months. Technical analysts examine price charts to identify support and resistance levels, leveraging this information to inform their buying and selling strategies. A consolidation pattern may be disrupted due to significant news releases or the activation of a series of limit orders.
Consolidation: Support vs. Resistance
Support and resistance levels form the boundaries of an asset’s price range, delineating a consolidation pattern. The upper bound establishes the resistance level, representing the peak of the price pattern, while the lower bound defines the support level, marking the bottom end.
When the price breaches these support or resistance areas, volatility escalates rapidly, presenting short-term traders with increased profit opportunities. Technical traders interpret a breakout above resistance as a signal for further price ascent, prompting them to initiate buy positions. Conversely, a breakout below the support level suggests further price depreciation, prompting traders to opt for sell positions.
Accounting Consolidation
In financial accounting, consolidated financial statements serve to present a parent company and its subsidiary as a unified entity. The parent company typically holds a majority stake in the subsidiary, while a non-controlling interest (NCI) holds the remaining shares. Alternatively, the parent may own the entire subsidiary outright, without involvement from other firms.
Consolidated financial statements involve adjusting the assets and liabilities of the subsidiary to reflect fair market values. These adjusted values are then integrated into the combined financial statements. If the amount paid by the parent and NCI exceeds the fair market value of the subsidiary’s net assets (total assets minus liabilities), the surplus is recorded as goodwill in the asset account. Over time, the goodwill is gradually expensed.
Consolidation entails eliminating any transactions between the parent and subsidiary, as well as those between the subsidiary and the NCI. Consequently, the consolidated financial statements only reflect transactions with external parties, while each company continues to produce its financial statements.
Example of Accounting Consolidation
Let’s consider a scenario where XYZ Corporation acquires 100% ownership of ABC Manufacturing, purchasing its net assets for $1 million. The fair market value of ABC’s net assets stands at $700,000. In the consolidated financial statements prepared by the accounting firm, ABC’s net assets reflect a value of $700,000, while the excess amount of $300,000 paid over the fair market value is recorded under a goodwill asset account.