A Step-By-Step Guide To Financial Consolidation

author Nicola van Rijn - 17 Oct 2022

Introduction

Financial consolidation can be a complex process, and many don’t know where to start. That's why we wrote this article providing a step-by-step guide to help you understand the financial consolidation process and what it takes to successfully consolidate your finances.

Read on for more information about the different steps involved in this important financial management task.

The Definition of Financial Consolidation

Financial consolidation is the process of combining the financial statements of multiple entities into a single set of reports. The goal of financial consolidation is to give management a clear picture of the financial health of the entire organization, as well as to comply with statutory and tax filing requirements.

When is Financial Consolidation necessary?

The first step in financial consolidation is identifying the need for it. Statutory requirements, filing regulations, tax optimization, and external financing are important factors that often require consolidated financial statements. You should also compare your company's financial statements to industry norms and competitors.

Another way to identify the need for financial consolidation is to look at your company's growth. If your company is growing rapidly, it may be difficult to keep track of all of your finances without consolidating them. Rapid growth can also put a strain on your existing financial infrastructure, which may lead to errors and inefficiencies.

If you're not sure whether or not you need to consolidate your finances, you should always consult with a financial advisor. They will be able to help you assess your company's financial situation and make recommendations about how to move forward.

The Fundamentals

The process of consolidation can be divided into several steps, which include:

  1. Establish a consolidation policy: This step involves outlining the accounting principles and methods that will be used in the consolidation process. This policy should be consistent across all subsidiaries or divisions, and should be in compliance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
  2. Establish the time schedule: Consolidation can be done on a monthly, quarterly, or annual basis, depending on the needs of the business. Once you determined the needs, you should set a time schedule for all subsidiaries involved, regarding the preparation and submission of their records. This schedule needs to be strictly followed to ensure an efficient and timely process.
  3. Gather financial statements: This step involves obtaining the financial statements of all subsidiaries or divisions, including balance sheets, income statements, and cash flow statements. These statements should be in compliance with the consolidation policy established in step 1.
  4. Eliminate inter-company transactions and balances: This step involves eliminating any transactions or balances that occur between subsidiaries or divisions, such as sales or loans. Where margins or profits have ocurred on intercompany transactions, these have to be eliminated. This is necessary because these transactions can create a double-counting effect that skews the consolidated financial statements.
  5. Adjust the financial statements for any differences in accounting methods used by different subsidiaries: This step ensures that all data is presented using the same accounting standards and valuation methods, and that the consolidated financial statements are consistent, accurate, and comparable.
  6. Calculation of non-controlling interest (also known as minorty interest): This step involves using the equity method or the cost method to calculate the non-controlling interest, which is the portion of the subsidiary or division that is not owned by the parent company. This is necessary because it ensures that the consolidated financial statements accurately reflect the proportion of ownership of each subsidiary or division.
  7. Preparation of consolidated financial statements: This step involves preparing a consolidated balance sheet, income statement, and cash flow statement that includes the financial information of all subsidiaries or divisions. This step should be performed in compliance with the consolidation policy established in step 1.
  8. Review and analysis: This step involves reviewing and analyzing the consolidated financial statements to ensure that they are accurate and complete. This step should be performed by a person who is independent of the consolidation process and has the knowledge to review and analyze the statements.
  9. Automation: This step involves using financial consolidation software to automate the process and minimize errors. This software can automate many of the manual steps and ensure that the process is performed quickly and accurately.

The Need For Solid Process

It's important to note that financial consolidation is not a one-time process, but an ongoing one. It should be performed on a regular basis, usually at the end of each accounting period, to provide management and other stakeholders with useful and reliable financial information.

Consolidation Methods

There are a few different methods that can be used in order to consolidate financial statements. The most common method is known as the equity method. This method involves taking the equity of each subsidiary and adding it to the parent company's equity. The second method is known as the complete absorption method. This method takes all costs and expenses from the subsidiary and includes them in the parent company's statement. The last method is known as pro-forma accounting. Pro-forma accounting consolidates the financial statements without regard to any ownership percentage.

Once the financial statements have been consolidated, it is important to review them carefully. This will allow you to identify any areas where there may be discrepancies between the records. If any discrepancies are found, it is important to correct them before finalizing the consolidation process.

By following these steps, you can ensure a successful financial consolidation process for your business.

Benefits of Financial Consolidation

When it comes to financial consolidation, there are a number of benefits that businesses can enjoy. For starters, consolidating your finances can help you get a better handle on your overall financial picture. This, in turn, can help you make more informed decisions about where to allocate your resources.

Consolidating your finances can also make it easier to track your progress over time. By keeping all of your financial information in one place, you can more easily identify patterns and trends. This information can be invaluable when it comes time to making strategic decisions about your business.

Finally, financial consolidation can also make it easier to obtain financing in the future. When lenders see that you have a solid track record of managing your finances, they will be more likely to approve loans or lines of credit. This can give you the capital you need to grow your business and pursue new opportunities.

Tips To Keep In Mind With Financial Consolidation

When you are consolidating your finances, it is important to keep a few things in mind:

  • Always be clear about your goals. What is the purpose of your financial consolidation and what type of financial statements do you need to prepare?
  • Develop a plan of action and set a strict time schedule for all parties involved. Communication is essential.
  • Be aware of the potential risks involved in consolidation. What could go wrong? What are the consequences of failure? How do you mitigate those risks?
  • Finally, remember that consolidation is not a quick fix or a one-off process. It is something you need to be able to follow on a recurring basis, using clear process steps, consistent methods and reliable tools.

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