Whether you are a group of two companies or a global conglomerate with subsidiaries in different countries and markets, finance consolidation and the preparation of group financial statements is a complex and technically challenging task that needs tackling correctly.
In this article, we answer the following questions:
- Does my company need to prepare consolidated financial statements?
- What is the finance consolidation process?
- What are the top financial consolidation challenges?
- How can technology help finance consolidation?
- What is Consolidation-as-a-Service?
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Does my company need to prepare consolidated financial statements?
According to the Companies Act 2006 (CA06), it is mandatory for groups to prepare consolidated group accounts. This consolidation will need to take into account subsidiaries, joint ventures and associate companies.
Small groups that meet two or more of the following three conditions are exempt:
- Turnover does not exceed £10.2m net, or £12.2m gross.
- Balance sheet total should not exceed £5.1m net, or £6.1m gross.
- Average number of employees does not exceed 50.
(Note: for this purpose, “net” means after eliminating transactions between group companies and “gross” means without those eliminations)
The consolidated financial statements rules apply to foreign subsidiaries as well, so if your company is based in the UK, your overseas subsidiaries must still be included in your consolidated accounts.
What is the finance consolidation process?
For many companies, the only time a full consolidation is performed, including the various technical eliminations and accounting adjustments, is annually because it’s required for the statutory accounts. Often external accountants are used because internal staff lack knowledge or confidence in consolidations.
On a monthly or quarterly basis, many smaller groups will perform a simplistic aggregation process rather than consolidation for the internal management accounts. This may be enough in the early days, but a business needs a practical financial consolidation framework to scale.
Financial aggregation simply adds the numbers together, usually in a spreadsheet and expresses them in a summary form. It gives the leadership team an indication of the ‘group’s financial performance but can be misleading because it does not include eliminations of intercompany trading.
On the other hand, finance consolidation is a more rigorous accounting process where groups combine all data for their subsidiaries (assets, liabilities and other financial data) into a single set of financial statements for the group as a whole. It is a challenging and time-consuming part of the month-end process and can put enormous pressure on the finance function. To eliminate double-counting, specific calculations and accounting adjustments are required to follow global guidelines (e.g. GAAP and IFRS).
The process is as follows:
- Run the month-end close at the entity level for each company in the group, including full reconciliation and agreement of all intercompany balances.
- Each company then submits accounts for consolidation at group level, often in an agreed format (the “unit input”).
- Assess the unit input in case adjustments may be needed (e.g. to switch from local GAAP to IFRS)
- Convert from local currency into the group currency and account for any resulting translation movements.
- Post intercompany elimination adjustments to remove the effect of transactions and balances between group companies.
- Post other consolidation adjustments such as accounting for the acquisition or disposal of subsidiaries, goodwill, elimination of subsidiary share capital, accounting for minority interests and other such technical matters.
- Report the results to both internal and external stakeholders. This will generally need to include a group cash flow statement and may also need to show bank covenant calculations as evidence of compliance.
What are the top Financial consolidation challenges?
Financial consolidation is a rigorous process requiring accurate financial data, expert project management, and compliance with accounting standards.
These are the most common challenges companies must overcome:
- Lack of confidence and/or technical knowledge in performing consolidation
- Time availability and staff resource
- Ensuring timely and accurate input data from subsidiaries
- Managing multiple currencies and their impact on the group accounts
- Using incompatible systems and tools
- Constantly changing statutory reporting and compliance requirements
- Differing accounting treatments in different countries
- Providing the leadership team with timely insights
How can technology help finance consolidation?
If you rely on spreadsheets for group accounting or struggle with QuickBooks, Sage and Xero’s basic financial tools, it may be time to rethink. There are tools that can automate and simplify the accounting consolidation process, for example, Konsolidator and Microsoft PowerBI.
Konsolidator is a Scandinavian company that has developed a solution to automate financial consolidation. It is an affordable Software as a Service (SaaS) application, available on a monthly subscription, targeted at helping the finance function in small and medium-sized companies.
PowerBI is a data visualisation application from Microsoft. It is also a secure, cloud-based application available on a monthly subscription.
Konsolidator and Microsoft have built a trusted network of partners, like ireport, who have the experience and expertise to help finance functions implement these tools correctly and effectively. Usually, they will handle the set-up process, train users and guide them through their first month-end, possibly two.
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What is Consolidation-as-a-Service?
For the finance function to play a strategic role in the business, the month-end process must take hours, not weeks, to complete. Financial consolidation is one of the most problematic and time-consuming parts of the month-end process.
If your business fits the following profile, it is worth investigating outsourcing your financial consolidation process to a Consolidation-as-a-Service provider like ireport:
- Annual revenues in the range £10m to £50m or higher
- Investor-backed
- Required to have an annual audit
- Need to consolidate three or more companies (UK and/or international)
- Have a busy, small finance team (four or five people) who may be fine with the day-to-day but think the international or technical element is frightening
- Running more than one accounting system
- Current accounting systems do not have inbuilt consolidation (such as Xero, Sage Line 50 and QuickBooks), so you may be doing consolidation in spreadsheets
Consolidation-as-a-Service providers like ireport offer cost-effective access (usually via a subscription) to the tools, people and skills needed to perform an accurate accounting consolidation process for your company on a monthly, quarterly, or annual basis.
If you think we can help, please contact info@ireportonline.co.uk, or complete our online form or call 01784 770880.