Final answer:
Consolidation of entities involves merging internal transactions, which affects financial statements, and often leads to reorganization and staff reductions. The government, through the FTC, plays a regulatory role to prevent excessive market power concentration, as seen in the Kinder Morgan / El Paso Corporation merger condition.
Step-by-step explanation:
The consolidation process in business involves combining two or more entities into a single larger entity. This can be through a merger, where both entities are roughly equal in power, or an acquisition, where one entity is dominant. When consolidating, entities often have upstream and downstream transactions that must be considered. Upstream transactions generally refer to interactions with suppliers or parent companies, while downstream transactions involve customers or subsidiaries. These transfers can complicate consolidation as they may involve internal transactions between the companies involved.
When two companies with such transactions merge, their combined financial statements must be adjusted to eliminate these internal dealings, since they are not indicative of the new conglomerate's external market performance. This ensures that the consolidated financial statements accurately reflect the economic activity of the combined entity. Additionally, the consolidation process often involves organizational restructuring and possible staff reductions due to duplication of services.
Regarding the role government plays, the Federal Trade Commission (FTC) often reviews potential mergers to prevent creation of monopolies or oligopolies that could harm consumers. For example, in the case of the Kinder Morgan/El Paso Corporation merger, the FTC required divestment of certain assets to prevent a strong concentration of market power. Government intervention seeks to maintain a balance between corporate size and healthy competition in the marketplace.