Why’s and What’s of Financial Consolidation
Financial Consolidation is perhaps one the complex and demanding financial exercise accountants engage on a monthly / quarterly basis. But why is the process demanding and complex and especially when enterprises run mature ERP and other transaction systems? And why is it a necessity?
The genesis of financial consolidation lies with Management and Statutory Reporting primarily. Management Reporting tends to be more analytical and unlike the structure in which the transactions are recorded. And Statutory Reporting which leans heavily on transparency & disclosure and dictated by bodies & standards like FASB, IFRS / IAB etc. In addition, industries like Banking, Insurance, Utilities tend to have special accounting and reporting requirements. From a pure transactional nature too, financial consolidation is required to eliminate inter-co transactions.
Typical financial consolidation in any industry is directed towards,
- Consolidated Financial Statements and Intercompany Eliminations (ARB51/IAS27)
- Consolidation of Majority-Owned Subsidiaries (FAS94/IAS27)
- Foreign Currency Transactions and Translations (FAS 8/FAS52/IAS21)
- Statement of Cash Flows (FAS95/IAS7)
- Disclosures about Segments of An Enterprise (FAS131/IAS14)
- Calculation of Goodwill / Minority Interest
- Elimination of Share Capital and Investments in Subsidiary
- Currency translation etc
As enterprises evolve in maturity, financial consolidation becomes a fulcrum for many management processes. A sound financial consolidation process enables a company to leverage the following
CFO and Business Intelligence
Planning and Budgeting: A detailed and robust consolidation provide the foundation for short term and long term operation and financial budgeting. It provides the necessary insights to base the plan and the inputs to decompose a budget. A good financial consolidation throws not only financial data but also statistical and analytical information.
Performance Review: Management cycle of Plan, Performance, Review and Correct is dependent on financial information to do the review and take corrective action. A sophisticated consolidation data not only reflects the variance to plan but provides an insight into the problem
Key Performance Management: As companies move towards linking corporate performance with individual’s responsibilities, consolidated financial data becomes a force for measuring and improving the enterprise performance.
