What Is Consolidation?

Consolidation in technical analysis refers to an asset oscillating between a well-defined pattern of trading levels. Consolidation is generally interpreted as market indecisiveness, which ends when the asset's price moves above or below the trading pattern. In financial accounting, consolidation is defined as a set of statements that presents (consolidates) a parent and subsidiary company as one company.

Key Takeaways

  • Consolidation is a technical analysis term used to describe a stock's price movement within a given support and resistance range for a period of time.
  • It is generally caused due to trader indecisiveness.
  • A consolidation pattern could be broken for several reasons, such as the release of materially important news or the triggering of a succession of limit orders.
  • Accounting-wise, consolidated financial statements are used by analysts to evaluate parent and subsidiary companies as a single company.
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Consolidation

Understanding Consolidation

Periods of consolidation can be found in price charts for any time interval, and these periods can last for days, weeks, or months. Technical traders look for support and resistance levels in price charts and then use these levels to make buy and sell decisions. A consolidation pattern could be broken for several reasons, such as the release of materially important news or the triggering of a succession of limit orders.

Consolidation: Support vs. Resistance

The lower and upper bounds of an asset's price create the support and resistance levels within a consolidation pattern. A resistance level is the top end of the price pattern, while the support level is the lower end.

Once the price 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 a breakout above resistance means the price will climb further, so the trader buys. On the other hand, a breakout below the support level indicates the price is falling even lower, and the trader sells.

Accounting Consolidation

In financial accounting, consolidated financial statements are used to present a parent and subsidiary company as one combined company. A parent company may own a majority percentage of a subsidiary, with a non-controlling interest (NCI) owning the remainder. Or the parent may own the entire subsidiary, with no other firm holding 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 minus liabilities), the excess amount is posted to 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.

Example of Accounting Consolidation

Assume XYZ Corporation buys 100% of the net assets of ABC Manufacturing for a price of $1 million, and the fair market value of ABC's net assets is $700,000. When an accounting 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.