What is the Financial Consolidation Process in Accounting?

In its simplest form, “consolidation” means bringing things together. In accounting, “financial consolidation” refers to combining financial data from multiple business entities and presenting it as a single, unified report for a parent company.

This process provides a clear, comprehensive view of an organization’s financial health and performance, enabling better decision-making by offering an integrated financial perspective.

Let’s explore the steps involved in financial consolidation and the tools modern accounting teams rely on to get it right.

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

Financial consolidation can be complex, but breaking it into three key steps makes it more manageable:

• Collect and map financial data: Gather trial balance data (e.g., assets, liabilities, equity, revenue, and expenses) from various general ledger systems and align it with a centralized chart of accounts.
• Consolidate data according to guidelines: Combine data using accounting standards
• such as U.S. GAAP or International Financial Reporting Standards (IFRS).
• Generate reports for stakeholders: Prepare financial statements such as income statements, balance sheets, and cash flow statements for internal and external audiences.

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, analysts apply specific calculations and adjustments 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 parent company combines the numbers from itself and its subsidiaries. This includes:

• Foreign currency translation to reflect global operations.
• Eliminating intercompany transactions to avoid duplication.
• Adjusting journal entries for consistency.
• Accounting for partial ownership based on controlling interests.

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, the parent company incorporates all the subsidiary’s financials (assets, liabilities, revenues, and expenses) into its 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 have finished their postings and uploaded 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.

The financial consolidation process in accounting 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.