Compiling company-wide financial data from numerous departments and subsidiaries can be challenging. Financial consolidation is a complex process that involves gathering financial data from multiple entities within a company or group of companies, dealing with multiple currencies, diverse accounting standards, and intercompany transactions.
While software can help steer this process, the complexity of corporate operations naturally increases as organizations grow and evolve, and your tools can soon prove inadequate. This article details the many aspects of financial consolidation that must be managed, the ideal tools for the task, and the key features to look for in future-proof financial consolidation solutions.
What is Financial Consolidation?
Financial consolidation combines and summarizes financial data from several departments or business entities within an organization. This information is later used to produce consolidated financial statements that present key aspects of company performance in a more structured and understandable format.
The financial close process must be completed before the accounting team can start data-gathering for financial consolidation. Data-gathering is the most laborious part of consolidation and involves aligning revenue, expenses, and profit calculations from multiple sources, which allows for a comprehensive financial outlook across the company.
Preparing financial statements is a relatively simple task compared to consolidation, assuming the information gathered is correct and trustworthy. It’s common for smaller companies to produce their financial statements without necessarily going through a consolidation process.
What Causes Financial Consolidation to Go Awry?
The two main factors that can impede the consolidation process are double-counting monetary sums and exchange rate errors when incorporating results from overseas units.
The standard measures for dealing with these two problems are:
Elimination of intercompany transactions: Double counting can happen if transactions between entities within the same organization occur, including intercompany sales, expenses, loans, or receivables/payables. Software tools are configured to flag these operations and track whether they have been counted at corporate and intercompany levels. Failure to remove these occurrences can result in inflated revenue or expense figures.
Converting to a common currency: Companies with divisions operating in different international jurisdictions must be vigilant in applying the correct exchange rates, particularly across similar transactions, so consolidated results can be accurately published in a single reporting currency. In most cases, this also includes calculating Cumulative Translation Adjustments (CTA), which become more complex with more currencies.
Less Obvious Causes of Consolidation Errors
Several more subtle ways errors can occur, which are not always immediately apparent unless you are directly involved in the consolidation process.
1. Consolidation Methodology
An important consideration is the Consolidation Methodology, which varies depending on the level of control the parent group has over its subsidiaries. Minority ownership or equity pick-up naturally affects the proportion of revenue or profit attributable to the parent company, and incorrect choice of methodology can severely skew the final figures.
The three main methodologies are full consolidation, Non-Controlling Interest (NCI), and the equity method.
Full Consolidation is used when the parent company owns all or most of a subsidiary. It considers all the subsidiary's assets, liabilities, revenue, expenses, and equity.
NCI Consolidation is preferred when the parent does not own 100% of the subsidiary. This method uses the percentage not owned by the parent company as the starting point. NCI can be measured at fair value or at the minority partner's fair value share of the subsidiary's identifiable net assets. This method ensures that financial statements reflect the ownership structure of the parent and subsidiary.
The Equity Pick-Up Method is used when the parent company owns 50% or less of the subsidiary company. The profits from such investments are reported as income in the parent's financial reports.
2. Adjusting for Fair Value
When assets and liabilities are transferred within the group, they must be recorded at their fair value rather than their book value. Errors in making or omitting these adjustments can result in misstated asset, liability, and equity values on the consolidated balance sheet.
3. Compliance with Accounting Standards for Consolidated Financial Statements
Financial consolidation must adhere to applicable accounting standards such as IFRS or GAAP. Errors can arise from a lack of understanding, misinterpretation, or converting from one standard to another (I.e. GAAP to IFRS) , particularly in complex areas like revenue recognition, leasing, or financial instruments.
4. Timing Differences
Acquired entities within a group may have different closing dates for their financial statements, which can create discrepancies between the figures submitted, or workflow differences may simply lead to delays in communication, a common cause of inconsistencies.
5. Data Entry and Reconciliation Errors
With the vast amount of data involved in consolidation, there is a high risk of errors if the work depends on manual data entry. There can also be discrepancies between parent and subsidiary companies' financial data, which must be reconciled.
Look for Financial Consolidation Software That Grows with Your Business
Financial consolidation requires sophisticated tools to handle large volumes of data from various sources. These solutions must ensure accuracy and compliance with relevant accounting standards and enable efficient data management through automation and advanced reporting capabilities. Financial consolidation software also facilitates enterprise performance management, providing strategic insights into the company's performance. They must also support data integration, real-time processing, and multi-currency and multi-entity reporting functionalities.
The crucial factor for future operability is that your consolidation tools can scale with the growth of the business. As businesses expand, they encounter more complex financial scenarios, such as managing multiple subsidiaries across different geographical locations and the additional currencies that can come with that.
These changing scenarios will likely result in increased transaction volumes and organizational changes, and the right tools are needed to accommodate this growth or new circumstances without sacrificing performance or financial integrity.
Key Features to Look for in Future-Proof Tools
Cloud-Based Architecture
Cloud-based financial consolidation software offers flexibility, scalability, and accessibility. It allows finance teams in multiple locations to access the same financial data and perform consolidations at any time.
Automation
A large component of financial consolidation is collecting, inputting, and reconciling data across the organization, which can be tedious and time-consuming if done manually. Automation speeds up this process and minimizes the opportunity for errors to arise. Automated workflows can streamline all processes in this operation, from data collection to report generation. Financial consolidation software aids in financial planning, budgeting, and forecasting.
Data Integration and Compatibility
An effective financial consolidation solution should seamlessly integrate with various data sources and business systems in your organization, ensuring that all financial data is accurately captured and relevant to the drafted reports. It is crucial to streamline and manage financial processes such as consolidation, forecasting, and variance analysis.
Real-time Reporting and Analytics
Tools equipped with real-time reporting capabilities provide instant access to consolidated data and can extract the exact metrics required for specific scenarios, allowing decision-makers to make informed decisions quickly. Management reporting is another crucial capability of financial consolidation software.
Customizable Dashboards and Reporting
Customizable dashboards and reporting functionalities allow businesses to tailor reports to meet specific requirements, enhancing the readability and relevance of financial statements.
Security and Compliance
It is paramount to ensure that financial data is secure and that consolidation processes comply with international financial reporting standards. The ideal tools will have these features built in.
User-friendly Interface
A user-friendly interface simplifies consolidation, reducing the learning curve and helping users perform their tasks more effectively and accurately.
Additional features of interest to companies with more specialized needs include forecasting and planning capabilities, which allow businesses to project future financial scenarios and plan accordingly, and mobile accessibility, which ensures that stakeholders can view reports, approve processes, and make decisions on the go—an increasingly important feature in today’s mobile-first world.
These last two features are advanced functionalities beyond the basic operational features required for consolidation but may be strategically important to certain companies. They add to the complexity of the consolidation process, further impacting the need for scalability and flexibility, for example.
However, for each company, the eventual decision on which tool to deploy could depend on the desired mix of the basic features, with more emphasis on some than others.
Which is the Right Solution for You?
Choosing the right financial consolidation software involves evaluating your current and future business needs, the product’s compatibility with existing systems, and its ability to adapt to changing financial landscapes. It’s also essential to consider vendor support and the degree to which the user community is involved, which can prove helpful for future troubleshooting and expedient installation of updates.
Goodbye Stress, Hello Efficiency in the Financial Close Process
If your company has spent too long wrestling with cumbersome financial consolidation processes, now could be the time to invest in an appropriate software solution. A system that leverages automation, integration, scalability, and real-time analytics will soon pay for itself, helping your company reach its strategic goals.
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