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Do we need a specific financial consolidation solution?

User AvatarPosted by James Salmon at 9/27/2019 5:29:01 PM
content type Industry Perspective


In pure accounting terms, financial consolidation is a formal, standardised set of accounting entries which is used to combine the results of several companies in a group that have common ownership.

Typically, this formal process is undertaken at least once a year for the Statutory year-end. However, an organisation can also choose to follow the same process at each month-end when producing its management accounts.

The range of accounting entries and the corresponding notes to the accounts that might be required could easily fill a medium-sized book. There are accountants that just specialise in Consolidation and it can be a complex topic.

For the majority of organisations, these entries can be whittled down to a handful of key topics and it's these which we will focus on here.

Key Considerations for a Financial Consolidation Solution

The key things to consider in deciding if you need a specific financial consolidation tool

The size of the group and the significance of the trading entities.

Most groups will have both companies that trade or companies that act as a group or holding entities. Trading companies carry out the business of the organisation. Holding/group companies typically don’t trade, but handle financing and loans and hold shares in other (trading) companies.

Consider whether the companies are all 100% owned by the group, or whether third parties hold minority interests. The larger the group and the more minority interests there are, the more likely formal consolidation is necessary in monthly accounting.

  • If a group is acquisitive, and/or shareholding percentages change frequently, then again formal monthly consolidation is more likely.
  • Another significant factor is Currency. In order to consolidate across companies with different currencies, a formal translation process is needed. Each company’s results are converted to the group currency, but the currency rates used vary between the P&L and the Balance Sheet (and sometimes other accounts within them). This creates a difference (the Cumulative Translation Amount “CTA”), which needs to be calculated during the translation. Companies with several currencies almost always consolidate each month-end, in some form or other.

 

 

Incidentally, Translation for consolidation should not be confused with Transaction gains and losses. We have had many an entertaining whiteboard session explaining the difference.

Inter-Company Trading

When it comes to the need for a formal tool, in our view, the most significant factor is whether you have Inter-company Trading. If one group company sells to another, but from a ‘whole group’ perspective no “real” external sale has taken place, this trade must be eliminated when considering the group results.

If there is significant trading between group companies, then eliminating this each month becomes material enough to consolidate. If the transactions are simply group loans, recharges or interest, it is less significant. Real trading of goods and services is what is seen as significant.

All these considerations will affect a CFO’s decision whether Accounting for Consolidation is needed for accurate monthly management information. Assuming that it is needed at some level, it doesn’t follow that additional tools are needed.

Somewhat confusingly, the process of consolidation does not necessarily need specialist consolidation tools. In the tool we use, IBM Planning Analytics, many consolidations can be achieved within the standard functions, without bolting on the specific Consolidation module.

Specific Consolidation Tool - IBM Cognos Controller

Much of the functionality needed to consolidate can be found in IBM Planning Analytics, formerly known as IBM Cognos TM1. The scalability and flexibility of the solution means Planning Analytics can be tailored to the specific use case of the client.  

IBM Cognos Controller is only needed where complexity increases. If there are minority interests across the group, or the group is very acquisitive, then the Consolidation module has functions to handle this. Similarly, there is a powerful Inter-company Trading Elimination engine to cope with higher inter-company trading volumes. If sub-consolidations are required at different levels in the group structure, again we recommend the Consolidation module.

Going further, some group consolidations can get very intricate. Areas such as the sale of fixed assets between group companies, for instance, can become very involved. If this sort of detail is required, then a specialist consolidation tool like IBM Cognos Controller should be considered. This will be dedicated to handling the most complex situations, but of course, will lack the wider planning and reporting capability of IBM Planning Analytics.

Considerations for your Consolidation Build

Serious consideration should be given to the consultants that implement your consolidation system. Number one is that they understand consolidation from an accountants’ perspective. It is very difficult to build a system if you don’t understand the rules you are configuring for. Not all consultants have accounting qualifications, and not all accountants understand consolidation. Don’t be afraid to ask that your implementation team has the right mix of skills.

In our experience, the majority of Group organisations do not need a full Consolidation module. In a lot of cases a simple aggregation of results, with currency translation, meets a customer’s requirements. Its all a question of materiality and what the most sensitive factors in any one group are. As ever, figuring out the most relevant and critical information to allow good management decisions are what drive the final choice.

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