What is the Financial Consolidation Process in the Accounting World?

By itself, the term “consolidation” simply means putting things together. But, in the accounting world, “financial consolidation” refers to the process of combining financial data from across business entities to roll the data up to a parent company for reporting purposes.

Consolidation provides a comprehensive overview of the financial health and performance of the entire organization, aiding strategic decision-making by offering a unified financial perspective for informed management decisions.

Let’s break down the steps for a proper consolidation process and the different consolidation tools modern accounting teams use.

A well-defined financial consolidation process involves several complexities and accounting principles.

Here are three key accounting consolidation steps in any finance consolidation process:

• Collecting trial balance data (e.g., assets, liabilities, equity, revenue, and expense accounts) from multiple general ledger systems and mapping it to a centralized chart of accounts.
• Consolidating the data following specific financial accounting consolidation rules and guidelines such as U.S. GAAP or International Financial Reporting Standards (IFRS).
• Reporting results to internal and external stakeholders.

Financial reports generated from preparing consolidated financial statements include the income statement, balance sheet, and statement of cash flows. More on these documents later.

To those unfamiliar with financial consolidation, it might sound like simply adding up numbers from a group of companies.

In financial consolidation, specific calculations and adjustments are applied to the data from child entities to create a unified set of financial statements for the parent entity.

However, financial consolidation involves specific calculations and adjustments as the numbers are combined from the parent company and its subsidiaries. This includes:

• Foreign currency translation
• Elimination of inter-company transactions and balances
• Adjusting journal entries
• Accounting for partial ownership

There are also different consolidation accounting methods that vary depending on the controlling stake a parent organization has in a subsidiary.

For example, if a parent company owns more than 50% of a subsidiary, all the subsidiary’s financials (assets, liabilities, revenues, and expenses) are incorporated into the parent company’s financial statements.

However, if a parent company has a significant but non-controlling stake in a subsidiary (typically between 20% and 50%), the equity method of Accounting is used. The parent records the investment in the subsidiary as an asset at the purchase price on its balance sheet.

When the subsidiary reports its net income, the parent company records revenue proportional to its share in the subsidiary’s profit.

So, if a subsidiary has a profit of $100,000 and the parent owns 30% of it, the parent would increase the investment asset value by $30,000 and record it as revenue, contributing to its retained earnings.

In a large enterprise, the financial consolidation process is typically administered by the accounting department, supervised by the Controller or VP of Accounting/Reporting, and ultimately overseen by the Chief Financial Officer (CFO).

Financial consolidation and consolidation accounting have been done manually and with spreadsheets for many years. While spreadsheets are widely used by Finance and Accounting, they weren’t designed to support a complex process like financial data consolidation.

Loading data from different systems into a spreadsheet is a manual process. With multiple tabs in a workbook, the spreadsheet can become unwieldy. Undetected errors can occur, and spreadsheets don’t provide adequate audit trails regarding changes to financial results in the process.

However, today there are several types of financial consolidation software available to streamline consolidation.

General ledger system

A general ledger (GL) system works well if an organization has a single ERP system but becomes cumbersome if there is a need to collect consolidated financial statements and results from multiple systems used by different locations or subsidiaries.

Financial performance management solution

Purpose-built financial consolidation applications are designed to integrate data from multiple sources, have specific features to manage the complexities of financial and debt consolidation, and typically include security and audit trail capabilities.

These systems have historically been deployed in on-premises data centers but are now available as cloud-based accounting solutions for consolidation and other financial processes.

Mi Hub, an international supplier of corporate uniform solutions, spans the U.S. and U.K., with each subsidiary maintaining different ERP systems. This created a decidedly slow and manual close and consolidation process.

“The data coming from the ERPs was incomplete, so we had to reconstruct it in Excel,” recalled Mark Hobbs, Head of FP&A at Mi Hub. “I was doing that in a massive Excel spreadsheet. It was all customized, and only I knew how it worked. I was the single point of failure.”

That’s when Mark found Planful and Mi Hub began to shave days off its consolidation process almost immediately.

Now, the U.S. and U.K. teams finish their postings and upload trial balance data from their legacy ERP systems to Planful. As a result, the team can deliver a draft of consolidated results in five days and the complete board packs just two days later.

Planful: Your Solution for a Transformed Financial Consolidation Process

The financial consolidation process is when you collect, consolidate, and report financial data from subsidiary business entities into a parent company.

With Planful, your organization can implement an effective financial consolidation process to achieve long-term success and maintain a competitive advantage.

Explore an interactive demo to learn about Planful’s financial consolidation solution.