How to do easy consolidation reporting for busy finance teams

Prophix ImageProphix Jul 2, 2024, 8:00:00 AM

Reporting is one of the most frequent and important parts of business accounting. The reports the financial teams generate are used as guidance and reference for the business and its subsidiaries. As beneficial as in-depth reporting can be, it can be a drain on time and human resources if you’re using inefficient or outdated methods.

Fortunately, when done right—and with the right tools—you can create these reports in a fraction of the time. Let’s dive in.

What is consolidation reporting? 

Financial consolidation is the process of combining the financial statements of multiple subsidiary companies into the financial statements of a parent company. This consolidated data is used to generate reports presenting the financial situation of a corporate group as if it were a single entity. This insight into the financial health of the group as a whole is used to shape high-level decisions and strategies. 

When do companies do consolidation reporting?

Generally, these consolidated reports are done in time with the organization's established financial cycle, since the information needed for the consolidated report will be provided by the subsidiaries at this time. The frequency you choose will be influenced by regulatory requirements, internal management needs, and the context of your business.

Monatlich

Monthly consolidations are done as part of the regular financial close process. More up-to-date data informs decision-making and operational adjustments.

Vierteljährlich

Companies are usually required to file quarterly financial statements with regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States. Even if they are not required by regulation for your particular business, a consolidated report is often recommended when the corporate group’s financial data is collected because of the valuable perspective it provides.

 Jährlich

Annual consolidations are a standard requirement for preparing year-end financial statements. In many cases, these statements may be audited and used for external reporting to shareholders, investors, and regulatory bodies.

What is a consolidated financial report?

Consolidated financial reports are crucial for providing a true and unbiased view of the financial position, performance, and cash flow of a given corporate group. The singular view these reports provide ensures decisions are data-driven and regulations are met.

The consolidated financial statement is a document that presents the financial position, results of operations, and cash flows of a parent company and its subsidiaries as if they were a single entity. It typically includes four sections:

  • Consolidated income statement: Presents revenues and expenses.
  • Consolidated balance sheet: Includes the group's cumulative assets, equity, and liabilities.
  • Consolidated cash flow statement: Presents the various cash flows from operating, investing, and financing activities across the group.
  • Consolidated statement of changes in equity: Shows any changes in the group's equity over the period.

Why is consolidation reporting important?

Beyond meeting regulatory requirements, consolidated reporting gives a quick financial overview of a potentially complex corporate entity as if it were a single company. By removing inter-entity transactions, consolidated statements show how the organization is performing as a whole without the noise of internal activities. This focuses the reports on how the business performs externally, and how it relates to external forces like competitors or markets.

Consolidation reporting best practices

The Generally Accepted Accounting Practices (GAAP) and International Financial Reporting Standard (IFRS) are the two standards that guide consolidation. Though the details may vary between them, the general goals are the same: clear, concise, and consistent consolidation reports. It is essential to have a clear understanding of the regulations and requirements that apply to your particular business. For a breakdown of both of these requirements, here is a look at GAAP vs IFRS principles.

What are the key steps in consolidation reporting?

There are numerous steps needed to perform a proper consolidation, and those steps will vary depending on your particular context. 

1. Purpose and scope of consolidation

Before consolidating financial statements, it's crucial to understand the purpose and scope of your reporting. Typically crafted by a parent company with controlling interest, they cater to stakeholders like investors, lenders, regulators, and management. Inclusive of parent company and subsidiaries, delineated by over 50% ownership or significant influence, this statement ensures transparency and compliance. Include both domestic and international subsidiaries, along with special-purpose entities, per relevant standards. This comprehensive approach provides a lucid, holistic view of the group's financial health.

 2. Determine included entities and controlling interests

Identify the businesses or subsidiaries that need to be included in the consolidated financial statement. This means determining which entities the parent company controls through either voting shares or significant influence. Both domestic and international subsidiaries should be considered, as well as special-purpose entities. There are different models for determining controlling interest which will be used in different situations.

Generally, there are two main models of calculating either control or whether a subsidiary should be included in a consolidated report. We covered the details of these two models, Variable and Voting Interest, in this article.

3. Gather financial information

Collect financial data from each entity that will be included in the consolidated report. Include all general ledgers and supporting documents. This is most efficient when all the companies or entities involved are using the same accounting and reporting policies. Maintaining consistent reporting across entities helps to streamline the process.

If possible, while collecting and organizing these reports from across the organization, take note of significant intercompany transactions, dividends, loans, or asset transfers for elimination or adjustment later.

4. Eliminate intra-group transactions and unrealized gains or losses

Eliminating intra-group transactions is one result of consolidated financial statements. These include transactions, such as sales, purchases, loans, dividends, and interest between all companies within the group. Also eliminate intercompany account balances like receivables, payables, and investments, as they represent internal transactions.

Remove both the recorded amounts and any related unrealized gains or losses. Removing these intra-group transactions leaves only external transactions.

5. Combine and disclose financial statements

Combine all the remaining financial data into one set of consolidated financial statements. This includes balance sheets, income statements, and cash flow statements. Do the same with assets, liabilities, equity, revenues, and expenses from each entity. Be sure to include the parent company's ownership interest as statements of changes in equity.

With all the financial data combined, the consolidated financial reports can be disclosed as needed, either filed with regulatory bodies or internally with company leadership or stakeholders. Depending on the audience, these reports can be edited to include or omit certain information or secondary calculations as needed.

Key steps in consolidation reporting

Consolidated report example

The team over at Magnametrics has put together an excellent practical example of what this looks like in action.

Magnametrics Consolidated report example

Consolidation reporting tools

Having the right tool for the right job leads to a better end product. For consolidated financial statements and reporting there are a few things to look for beyond just a single point solution. Ideally, you will want a unified financial performance platform that meets all of your organization’s needs – from budgeting and planning to financial close and consolidation.

Let’s look at the difference between a financial consolidation solution and a reporting solution, and then the benefits of bringing both of those together into one platform.

Financial consolidation solutions

A solution that is specific to financial consolidation will be equipped to understand the unique requirements of the close process. It will automate multi-currency translations and sub-consolidations while meeting compliance standards. Often, audit reports will be built in too so you can speed up internal or external audit processes.

Reporting solutions

As we mentioned at the beginning of this post, financial reporting doesn’t have to be a manual, labor intensive process if you have the right solutions on your side. Financial reporting solutions offer automation and built-in capabilities so that the maintenance of your data and subsequent updates and reports is always up to date. This is especially important for financial consolidation. Standardizing the reporting process and policy across the corporate group can ensure that your consolidated reports are always using accurate, error-free data.

How Prophix One™ can simplify your consolidation reporting

Prophix One is a financial performance platform that offers solutions and integrations to streamline every stage of your day-to-day financial activities, from strategic planning to forecasting, to financial consolidation and close.

Fast and dynamic data integration

Centralizing your financial data in a single platform gives you a holistic view across your entire company’s performance. Data integration allows you to connect to your accounting, ERP, CRM, or HRIS systems in a secure, encrypted platform so you can use the same data across your FP&A processes.

For your consolidations this means that you never have to worry about where your data is, or risk it being lost in transit. Integrate your subsidiary data sources and have everything at your fingertips.

Automation and intelligence

With all of your data consolidated in one platform, tasks that can be a drain on your team’s time and energy can now be automated and completed in record time while significantly reducing the risk of user errors. Consolidated financial reports depend on solid, reliable data to be accurate and provide the insights you need.

Common questions about consolidation reporting

Let’s take a look at a few common questions about consolidation reporting and clear them up.

What is consolidation reporting?

The term “consolidation” is itself commonly used in two business contexts: either to refer to the reports in business accounting we are discussing here, and also to refer to the actual amalgamation of two companies into a single whole. In the accounting sense, it is only the presentation of the company as if it were a singular whole. In the second sense, it is the actual creation of a single business identity which overtakes the previous one.

Consolidation reporting is exactly that: reporting. There is no actual amalgamation between companies taking place. Rather it is a report which presents the financial data of the group of companies.

What is a consolidated financial report?

A consolidated financial report is the financial data of a corporate group after removing all of the inter-group transactions. By removing these transactions, the consolidated report presents the financial status of the group as if it were a single organization. This unified view provides a better understanding of the group’s performance as a whole and its situation within the larger external context of the market and its competitors.

What are the rules for consolidation?

Unless your business is governed by industry-specific requirements, the GAAP and IFRS are the general authority on consolidation practices, aiming for clear, concise, and consistent reports. Understanding your business's specific regulations is crucial.

Conclusion: Make consolidation reporting easier with Prophix One™

Consolidations can be tricky: you need reliable data, attention to detail, and time. Automation takes the skills and quality your team has already and supercharges it, allowing them to invest their time in the unexpected challenges that automation cannot.

For fast, reliable consolidation, Prophix One has the features you need to empower your financial teams. Want to see what it can do for your business? Check out this short video on Prophix One Financial Consolidation and see what you can do.

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