Group Financial Consolidation: Best Practices

In corporate finance, the need for accurate financial reporting cannot be overstated. One way organizations can build this reporting framework is to adopt practices like financial consolidation. This strategy boosts balance sheet accuracy and financial accountability for parent companies.

This article explores group financial consolidation, including its benefits, challenges, strategies, and its impact on finance teams. We'll also explore how automated systems assist in the preparation of consolidated financial statements.

Understanding Financial Consolidation

Definition of Financial Consolidation

Financial consolidation is when a company combines the financial data of its subsidiaries and departments into a single financial statement. This provides a comprehensive view of a company's financial standing in a given reporting period.

Accounting departments, when performing consolidation, review financial data sources like assets, liabilities, revenue, and expenses. The final aggregated statement helps draft key financial reports, such as income statements, balance sheets, and cash flow statements. These reports are then shared with company management and stakeholders for financial planning.

Many companies prepare consolidated financial statements every month. Other firms prefer quarterly or annual reporting.

Types of Consolidation Accounting

There are three types of consolidation accounting:

Full Consolidation

Full consolidation is done when the parent company owns all or most of a subsidiary company. This type considers all the assets, liabilities, revenue, expenses, and equity of the subsidiary. The idea here is to present a holistic view of the parent company's financial position.

Proportionate Consolidation

Proportionate consolidation is used in cases of joint ventures or partnerships. The parent company only considers the percentage it contributes to the entity. In other words, the consolidated statements will only account for the parent company's portion of the venture's shares.

Equity Method

The equity method of consolidation is used when the parent company doesn't have full control over the subsidiary company but owns 50% or less. The profits generated from such investments are reported as income in the parent's financial reports—increasing proportionally according to the equity the parent company holds. 

The Financial Consolidation Process

The process of financial consolidation involves specialized data collection methods, accountability guidelines, and financial reporting software tools.

Data Compilation and Validation

This step involves collecting trial balance data from all subsidiaries as well as obtaining additional sub-ledgers, continuity schedules, acquisitions, investments, and other financial and non-financial data. This data is then imported and mapped to a centralized chart of accounts for calculations, currency conversions, and data adjustments.

Data Transparency Guidelines

Specific rules govern the process of financial consolidation in accounting, especially among public companies. These rules include Generally Accepted Accounting Principles (GAAP) and the International Accounting Standards Board’s International Financial Reporting Standards (IFRS). There’s also the Accounting Standards for Private Enterprises (ASPE), which is an accounting framework used by certain small-to-medium-sized private businesses.

GAAP, IFRS, and ASPE rules aim to ensure that financial statements are clear, consistent, transparent, accurate, and easily verifiable.

Group Financial Consolidation Software

Some accounting teams prepare financial consolidation with Excel due to the tool's affordability and accessibility. This approach can, however, lead to data errors, duplications, and other issues. Another approach is to leverage Enterprise Resource Planning (ERP) systems, which, while helpful, cannot efficiently integrate multiple entities that are on multiple ERP systems.

Many accounting professionals now opt for purpose-built consolidation software to streamline financial consolidation processes and compliance. Software solutions like these streamline data collection, compliance, and reporting. They also reduce errors and save time for corporate accounting and finance teams.

How Automated Systems Handle Financial Consolidation

Finance teams generally adhere to the following steps when employing financial consolidation software:

1. The consolidation software collects trial balance data from all necessary points within the company.
2. The software performs consistency and accuracy checks on the collected data to ensure data quality.
3. The software undertakes currency translation for financials operating in different currencies. This ensures that all financials are presented in a common currency.
4. The software automatically performs complex consolidation calculations and eliminates intercompany transactions to prevent errors.
5. The software generates consolidated financial statements in compliance with accounting standards and regulations.

Benefits of Group Financial Consolidation

Evaluating a company’s business interests as a whole provides strategic insights into its financial position, stability, profitability, and growth potential. This improves decision-making and goal management among the internal and external stakeholders of the company.

Additional benefits of financial consolidation can include:

• Improved accountability: Consolidation regulations help ensure transparent, accountable, and compliant financial reporting.
• Streamlined finance departments: With automated consolidation, finance teams spend less time preparing consolidated financial statements and can focus on other key business initiatives.
• Improved balance sheet accuracy. By eliminating intercompany transactions and other duplications, consolidated financials help reduce data errors—giving internal and external stakeholders an accurate picture of a company's financial performance.
• Enhanced parent company oversight: With financial consolidation, companies can better oversee their various businesses and investments. Management can also better handle performance management.
• Optimized financial data management. Financial consolidation ensures that trial balance data is centralized, making it easier to manage. This also helps manage accounting records and reduces auditing-related complications.

Challenges Associated with Financial Consolidation Processes

Most challenges in the consolidation process are related to using manual processes. For example, manual data entry can be labor-intensive, time-consuming, and error-prone, especially when there are multiple entities and disparate systems. ERP modules can also take a long time to implement and even longer to learn. 

Additional complications can arise from: 

• Not following guidelines: Some private companies prepare financial statements without necessarily following GAAP/IFRS guidelines. This may affect the accuracy and transparency of their financial reporting.
• Using the wrong financial consolidation software: Substandard automated systems can't sufficiently address the complexities involved in financial consolidation. These systems are also susceptible to data inaccuracies and other errors. 
• Data security problems: If the chosen financial consolidation method doesn't adequately protect data, it can lead to unauthorized access and data manipulation.
• Changing reporting requirements: GAAP, IFRS, and other guidelines can change over time. Without an effective system, it can be difficult to keep up with the changes.
• Scaling issues: As a company scales, so does its business data. Using outdated financial consolidation methods can result in performance bottlenecks, slower calculation times, and a higher risk of errors. 

Circumventing Challenges in the Financial Consolidation Process

The success of financial consolidation hinges on the approach a parent company takes. When done right, a smooth process is almost guaranteed. However, when done improperly, undesirable outcomes can arise. Some ways to counter the common challenges associated with financial consolidation include:

• Leveraging purpose-built financial consolidation software tools to ensure accuracy and optimize time to close
• Ensuring financial data is collected with the right level of detail
• Staying abreast of changing regulations and GAAP/IFRS compliance standards
• Providing adequate training for finance teams and ensuring clear communication across teams
• Producing high-quality financial reports that effectively highlight corporate performance
• Performing quality audits of all data sources and consolidated financial statements

Financial Consolidation FAQs

What Are the Rules of Consolidation?

Consolidation has many rules, including managing intercompany transactions, performing currency conversions, and following regulatory guidelines. Rules help ensure an accurate and accountable consolidation process.

What Is the Purpose of a Group Financial Statement?

A consolidated group financial statement provides a unified view of a company's financial health, stability, and growth potential. This consolidated data also helps draft a company's consolidated balance sheet, consolidated income statement, and consolidated cash flow.

What Is the Difference Between Consolidation and Equity Accounting?

With full consolidation, a parent company reports all the financial information of the subsidiary. With the equity method, the company reports its portion of the venture's shares as an investment.

Key Takeaways for Finance Departments

Financial consolidation is when a parent company compiles the financial data of its business interests into one financial statement. The benefits of this process include improved accountability, better parent-company oversight, and efficient asset management. However, challenges can arise from using outdated consolidation methods, data errors, evolving guidelines, and scaling hurdles.

To overcome these challenges, it's crucial to leverage financial consolidation software, invest in team training, and emphasize reporting quality. Fluence's financial consolidation software provides the invaluable insights companies need to make the best decisions. Clients can also expect rapid deployment, ease of use, and strategic value. Consider requesting a demo today.