How to Setup Financial Consolidations
Based on inquiries our firm receives from midsize companies that have expanded to the point where they have multiple subsidiaries, there is often confusion on how to setup financial consolidations. The concept of a consolidation company and its relation to the parent company can be confusing. Some accountants and system consultants, without experience in the area, think that subsidiary results should be consolidated into the parent company. This is not true. When that is done, you don’t have a distinct trial balance for the parent company (which you will need for statutory and tax filings for the stand-alone entity). A financial consolidation (often referred to as a consolidation company) is really a “virtual” company because a consolidation is just the sum of all companies in the group (that qualify for 100% consolidation) regardless of their status in the legal structure. Any one subsidiary is no different from the parent. Therefore, in almost all systems or even if you do it manually, you should setup a separate company in the system (or the concept in a spreadsheet) for the consolidation itself and leave the parent in its own company.
If you have multiple divisions that you need to report independently, then you need to do intra-divisional eliminations so that you have accurate net P&L and balance sheet balances reported accurately for the division. We prefer that this is done in the group (top level) and that the consolidation structure is flat; if there is a division of responsibility and each division has its own accounting responsibility, then multiple accountants can have access to the consolidation company, and (if the system allows) security can be configured to only allow them to post eliminations and adjustments in their own divisions.
If that is not feasible (due to multiple databases/data centers in multiple locations), then consolidation companies should be setup for each division and then the divisional consolidations feed into the top-level group consolidation (via file/data transfer). Or separate consolidation spreadsheets maintained for each division.
When you do financial consolidations in Excel without the functionality of a system, you lose a lot of potentially useful data. Most systems allow consolidation of multi-dimensional data with accounting entries (Department, Cost Center, Region, Line of Business, Customer, etc) that will allow you to present your consolidation in more meaningful ways (beyond the traditional subsidiary column layout). With Excel this is essentially not possible.
Our firm, EmergeNext, has tremendous experience in this area. If you would like ad-hoc consulting services in how to setup financial consolidations, let us know and we can assist with analysis, system design, policies & procedures, testing, etc to help you on your way.
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