Consolidation

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What is 'Consolidation'

Consolidation is used in technical analysis to describe the movement of a stock's price within a well-defined pattern of trading levels. Consolidation is generally regarded as a period of indecision, which ends when the price of the asset moves above or below the prices in the trading pattern. Consolidation is also defined as a set of financial statements that presents a parent and a subsidiary company as one company.

BREAKING DOWN 'Consolidation'

Periods of consolidation can be found in price charts for any time interval, and these periods can last for days or months. Technical traders look for support and resistance levels in price charts, and traders use those levels to make buy and sell decisions.

The Differences Between Support and Resistance

The upper and lower bounds of the stock's price create the levels of resistance and support within the consolidation. A resistance level is the top end of the price pattern, while the support level is the lower end of the pattern. Once the price of the stock breaks through the identified areas of support or resistance, volatility quickly increases, and so does the opportunity for short-term traders to generate a profit. Technical traders believe that a breakout above the resistance price means that stock price is increasing further, so the trader buys the stock. On the other hand, a breakout below the support level indicates that the stock price is moving even lower, and the trader sells the stock.

How Consolidations Work in Accounting

Analysts and other stakeholders use consolidated financial statements, which present a parent and a subsidiary company as one combined company. A parent company buys a majority ownership percentage of a subsidiary company, and a non-controlling interest (NCI) purchases the remainder of the firm. In some cases, the parent buys the entire subsidiary company, which means that no other firm has ownership.

To create consolidated financial statements, the assets and liabilities of the subsidiary are adjusted to fair market value, and those values are used in the combined financial statements. If the parent and NCI pay more than the fair market value of the net assets (assets less liabilities), the excess amount is posted a goodwill asset account, and goodwill is moved into an expense account over time. A consolidation eliminates any transactions between the parent and subsidiary, or between the subsidiary and the NCI. The consolidated financials only includes transactions with third parties, and each of the companies continues to produce separate financial statements.

Assume, for example, that XYZ Corporation buys 100% of the net assets of ABC Manufacturing for a price of $1 million, and that the fair market value of ABC's net assets is $700,000. When a CPA firm puts together the consolidated financial statements, ABC's net assets are listed with a value of $700,000, and the $300,000 amount paid above the fair market value is posted to a goodwill asset account.

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