How to draft your consolidation manual?
The consolidation manual is one of the tools needed to optimize the consolidation process. What should it contain? We have set out nine key points:
1) The role(s) of each stakeholder in the consolidation process
What is the involvement and responsibility of subsidiaries? Who is responsible for providing information within these entities? Who should validate it? What is the scope of activity of the parent company’s consolidation department? With whom and at what level is the audit managed? The answers to these many questions must be identified clearly in the consolidation manual.
2) Rules on change in scope of consolidation
How do you centralize changes in scope of consolidation? Using what information system should new entities be created, acquired and managed? With whom should the consolidation team work to safeguard this aspect? What essential information is needed by the consolidation team to ensure the effective treatment of these changes in the consolidation process? The consolidation manual must set out clearly all rules and useful information to manage changes to the scope of consolidation.
3) Procedures of validation of information and rules on acceptance of information
Who, when and by what method will information from subsidiaries be validated? Will validation take place at subsidiaries? What are the materiality thresholds? Who decides them? Who confirms information at the subsidiary and who accepts it at the parent company? What controls of the consolidation package and system are there? Does the consolidation system have a workflow? What is the difference between a warning and a fatal error? Where does the audit fit into this process? All these questions about validation must be dealt with in the consolidation manual.
4) Using a consolidation package
Other than in the case of a totally integrated system, we consider the use of a consolidation or reporting package to be essential. This raises several questions: What form should this package take? Is it tailored to the group in question? Can it be interfaced with the consolidation software? Can you combine it with other methods of reporting information? What is the accuracy level? Who should complete it and how? What information should it collect? Without dealing specifically with all of these different points, the consolidation manual should nevertheless clarify whether a consolidation package is in use and, if so, who should complete it and in accordance with which process and what time schedule? Finally, as mentioned above, we consider a procedure for the validation and acceptance of the package to be essential to the creation of a consolidation manual worthy of the name.
5) The thresholds applied by the group and the information to be reported based on the consolidation method
Groups of a certain size can optimize their consolidation and reporting processes by excluding certain non-significant shareholdings and/or limiting the level of detail required, depending on the consolidation method (essentially relating to equity consolidation). What is a non-significant subsidiary? What is the minimum level of information required depending on the consolidation method or the materiality threshold? At this level, the consolidation manual will provide information on the thresholds to be taken into account and, in accordance with the consolidation method, the minimum level of detail to be provided to the parent company’s consolidation unit.
6) References for currency rates and conversion regulations
What is the source of currency rates used? What is the time schedule for communication of these rates (monthly, quarterly, etc.)? What conversion method is used by the group? There are many elements for the group to deal with in its consolidation manual to avoid numerous currency conversion differences!
7) Regulations on reconciliation of inter-company transactions
What are the different types of inter-company transactions proper to the group? How should these inter-company reports be reconciled? What documentary evidence should support reconciliation? What are the acceptable thresholds beyond which there is no benefit in reconciling differences? Is inter-company reconciliation centralized at the parent company or decentralized to subsidiaries? Using what system(s) will inter-companies be the subject of reconciliation? How does this system work?
8) Using a single accounting framework and the group’s accounting policies
Will the group’s accounts be drawn up per IFRS? per local GAAP? With the accounting framework, imposed or chosen by the group, what are the group’s accounting policies? What is the effect of these policies on the process of standardizing the accounts of subsidiaries? By category, what significant adjustments should subsidiaries or the consolidation unit make before integration in the consolidation process? Who will be in charge of what process? It is a prerequisite that the consolidation manual deals in depth with the different elements in relation to the Group’s accounting framework and the impacts of the group’s accounting choices on the processes of standardization of subsidiaries’ accounts.
9) Timing of the consolidation process
By when should data from subsidiaries be reported to the consolidation unit? What is the deadline for reconciliation of inter-company transactions? What is the deadline for completion of inter-company reports? Within what time period must subsidiaries make corrections to their accounts? When will subsidiaries’ accounts and consolidated accounts be audited? For when should a first consolidated version of the group’s accounts be prepared? What is the deadline for submission for review of the final consolidated accounts? When is the board meeting scheduled?
A group’s consolidation manual must plan carefully the different key dates of the consolidation process. An organized diary in the form of a number of set deadlines following the end of the accounting period should be complemented by an additional consolidation schedule setting out precisely the deadlines throughout the year.