Final answer:
Deconsolidation occurs when a company eliminates the results of operations and cash flows of a component or has no significant continuing involvement in that component. It can happen when a company sells a subsidiary, spins off a division, or closes down a business segment.
Step-by-step explanation:
When a company eliminates the results of operations and cash flows of a component, or there is no significant continuing involvement in that component, it is called deconsolidation. Deconsolidation can occur for various reasons, such as selling a subsidiary, spinning off a division, or closing down a business segment. When deconsolidation happens, the company removes the assets, liabilities, revenues, and expenses associated with the component from its financial statements.
For example, let's say a company has multiple subsidiaries. One of its subsidiaries is not performing well and consistently incurring losses. In order to improve its overall financial performance, the company decides to sell the subsidiary. As a result, the company will deconsolidate the subsidiary's financial results, meaning it will eliminate the subsidiary's operations and cash flows from its financial statements.
In another scenario, a company may decide to spin off a division into a separate entity. In such cases, the company will deconsolidate the division's financial results, as there will no longer be a significant continuing involvement with that component.