• Neil Doyle

Financial Consolidation demystified

I’ve heard a lot of talk recently about Financial Consolidation, maybe too much talk. Some like to make it sound like something very complex and inaccessible. Actually it is something very simple that merely provides an overview of the total organisation’s performance based on inputs from the separate legal entities in the group.

The only difficulties arise in understanding that the results of each separate legal entity are produced based on rules which apply to each of those legal entities in isolation, in the jurisdictions in which each operates. So Financial Consolidation is essentially understanding what has happened in each entity from the perspective of the group and recreating those results in a way which shows group level performance.

If only it was possible to just ‘add together the numbers’: but that is aggregation, not consolidation. And it is mayhem if the legal entity results are in different currencies: apples and oranges.

So once the legal entities have been translated into the group currency, what happens next? The results of each legal entity in the group are the result of a set of transactions during each entity’s financial year. From a group perspective some of those transactions will be relevant, some won’t, and some may indeed be missing. How can transactions be ‘missing’? Fear not: no good FD of a legal entity could allow any material transactions to be missing - same for the auditors signing off on those accounts. What happens is that some transactions relevant to the overall group will be recorded in one legal entity but not in another.

For example, if one company sells items to another legal entity in the group, the first will record the sale at the time of shipping, whereas the purchaser will record the purchase when they receive the materials. Timing differences inevitably occur: the group FC will need to reconcile the intercompany transactions to make sure that group sales match purchases in this instance, and that these intercompany transactions are properly recorded. The problems arise in the huge volumes of data involved and keeping a close track on the full reporting available from each group legal entity.

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