The standardisation of accounts: a complex step in the consolidation process

The standardisation of individual accounts: a complex step in the consolidation process

This is the fourth and final article in our series about the account consolidation process.

In our previous article, we underscored the importance of the consolidation package as a determining aspect of the overall process.

The same holds true for the standardisation of individual accounts which is one of the most technical steps. It requires the most rigour, supporting documents and follow-up over time.

Its impact on the reconstitution of consolidated shareholders’ equity year after year has given cold sweats to many a consolidation accountant.

This technical term isn’t common, but it expresses a very tangible reality.

Even though many countries have adopted IFRS standards for the consolidation of group accounts, and we have been living a period of increasing standardisation in accounting practices over the past ten years, the same does not hold true for individual, corporate and statutory accounts which are still often subject to local accounting and tax rules.

Even if every country in the world were to comply with a single set of accounting standards, their interpretation and application, as well as the introduction of tax exceptions, would make the standardisation of individual accounts inevitable and even compulsory to ensure the financial coherency of consolidated financial statements.

In fact, from a financial standpoint, a group of companies which publishes consolidated accounts must provide a consistent picture of its financial situation and performance.

The diversity of local account valuation and presentation rules must be homogenised to provide a single picture of the overall group.

In preparation for this step, we believe that a group chart of accounts must be implemented and managed centrally and, a consolidation manual must be prepared and disseminated with, among other things, all of the group’s valuation, accounting and presentation rules.

In terms of organisation, we would ideally recommend that standardisation adjustments be done by the subsidiaries themselves.

The central consolidation department will be involved to provide advice and corrections to the adjustments as well as feedback to the entity to ensure effective internal follow-up.

It’s clear that the consolidation software application must make decentralising responsibilities possible.

Using a computer tool based on the latest advances in information processing and exchange technology will be a requirement for this purpose.

In addition, it should again be noted that account standardisation involves all of a group’s companies, regardless of the consolidation method used at the individual level.

In practice, this means that, for equity-consolidated companies, application of this standardisation principle is not always easy to accomplish given the lack of information received from entities over which there is no effective control.

A few examples of adjustments

In order to illustrate our argument, we will review two potential cases of standardisation adjustments, i.e. start-up costs and amortisation and depreciation adjustments.  For simplification purposes, we have omitted deferred taxes from our examples.

Start-up costs

Let’s take the example of a group whose accounting policy does not include the capitalisation of start-up costs, but enters them as they are incurred (as is the case in IFRS). In 2011, subsidiary A of the group entered start-up costs in the amount of €100,000 as an asset, with an amortisation period of four years.  As a result, adjustment entries must be included in the consolidation.

 

In 2011 (cancellation of the capitalisation of start-up costs and related amortisation)

Debit Amortisation of Start-up Costs A (SC) (Balance Sheet)EUR 25.000
Debit Income Statement A (PP)EUR 75.000
Credit Start-up Costs A (SC) (Balance Sheet)EUR 100.000

 

In 2012 (reversal of 2011 entries to reconstitute the consolidated shareholders’ equity and cancellation of 2012 amortisation)

Debit Amortisation SC A (Balance Sheet)EUR 25.000
Debit Consolidation Reserves A (Balance Sheet)EUR 75.000
Credit SC A (Balance Sheet)EUR 100.000

 

Debit Amortisation SC A (Balance Sheet)EUR 25.000
Credit Income Statement A (PP)EUR 25.000

 

In 2013 (reversal of 2011 and 2012 entries and cancellation of 2013 amortisation)

Debit Amortisation SC A (Balance Sheet)EUR 50.000
Debit Consolidation Reserves A (Balance Sheet)EUR 50.000
Credit SC A (Balance Sheet)EUR 100.000

 

Debit Amortisation SC A (Balance Sheet)EUR 25.000
Credit Income Statement A (PP)EUR 25.000

 

In 2014 (reversal of the entries for the previous periods and cancellation of the year’s amortisation)

Debit Amortisation SC A (Balance Sheet)EUR 100.000
Debit Consolidation Reserves A (Balance Sheet)EUR 25.000
Credit SC A (Balance Sheet)EUR 100.000
Credit Income Statement A (PP)EUR 25.0000

 

In conclusion, we can see that the adjustment to start-up costs is a timing difference for the income in the corporate accounts and the consolidated accounts which, after four years, is reabsorbed, leaving no difference in consolidated shareholders’ equity.

This will obviously not be the case during the years in which the group’s results are impacted by the timing differences.

 

Amortisation and depreciation adjustments

Let’s assume that subsidiary B of our group purchased a production machine in 2011 for EUR 200,000 which it depreciates on a straight-line basis over four years. The group’s policy is to depreciate this type of machine based on the number of production units forecast, i.e. a total of 170,000 units over four years (50,000 in year one, 45,000 in year two, 40,000 in year three and 35,000 in year four).

As a result, there will be a discrepancy between the depreciation entered locally and that required for the consolidated group.  Let’s see what this looks like in numbers:

 

In 2011

Depreciation at the subsidiary level: EUR 200,000/4 = EUR 50,000

Depreciation at the group level: Units produced: 50,000.  Therefore:

EUR 200,000 * 50,000/(50,000+45,000+40,000+35,000)=EUR 58,824

 

The depreciation difference is EUR 8,824 to be consolidated compared to the corporate accounts:

Debit Machine Depreciation B (PP)EUR 8.824
Credit Machine Depreciation B (Balance Sheet)EUR 8.824

 

In 2012

Depreciation at the subsidiary level: EUR 200,000/4 = EUR 50,000

Depreciation at the group level: Units produced: 45,000.  Therefore:

EUR (200,000-58,824) * 45,000/(45,000+40,000+35,000)=EUR 52,941

 

The depreciation difference is therefore EUR 2,941 to be consolidated compared to the corporate accounts:

Debit Consolidation Reserve B (see 2011)EUR 8.824
Credit Machine Depreciation B (Balance Sheet) EUR 8.824

 

Debit Machine Depreciation B (PP)EUR 2.941
Credit Machine Depreciation B (Balance Sheet)EUR 2.941

 

In 2013

Depreciation at the subsidiary level: EUR 200,000/4 = EUR 50,000

Depreciation at the group level: Units produced: 40,000.  Therefore:

EUR (200,000-58,824-52,941) * 40,000/(40,000+35,000)=EUR 47,059

 

The depreciation difference is therefore EUR 2,941 to be deducted in the consolidation compared to the corporate accounts:

Debit Consolidation Reserve B (see 2011)EUR 8.824
Credit Machine Depreciation B (Balance Sheet)EUR 8.824
Debit Consolidation Reserve B (see 2012)EUR 2.941
Credit Machine Depreciation B (Balance Sheet)EUR 2.941

 

Debit Machine Depreciation B (Balance Sheet)EUR 2.941
Credit Machine Depreciation B (PP) EUR 2.941

 

In 2014

Depreciation at the subsidiary level: EUR 200,000/4 = EUR 50,000

Depreciation at the group level: Units produced: 35,000.  Therefore:

EUR (200,000-58,824-52,941-47,059) * 35,000/(35,000) = EUR 41,176

 

The depreciation difference is therefore EUR 8,824 to be deducted in the consolidation compared to the corporate accounts:

Debit Consolidation Reserve B (see 2011)EUR 8.824
Credit Machine Depreciation B (Balance Sheet)EUR 8.824
Debit Consolidation Reserve B (see 2012)EUR 2.941
Credit Machine Depreciation B (Balance Sheet)EUR 2.941
Debit Machine Depreciation (Balance Sheet)EUR 2.941
Credit Consolidation Reserve B (see 2013)EUR 2.941

 

Debit Machine Depreciation (Balance Sheet)EUR 8.824
Credit Machine Depreciation (PP)EUR 8.824

 

In other words:

Debit Consolidation Reserve BEUR 8.824
Credit Machine Depreciation B (Balance Sheet)EUR 8.824
Debit Machine Depreciation (Balance Sheet)EUR 8.824
Credit Machine Depreciation (PP)EUR 8.824

 

The conclusion we can draw from this example is the same as we saw for start-up costs, i.e. a timing difference in income which will have no impact on consolidated shareholders’ equity after four years.

The income of the intermediate periods may, however, be significantly impacted by all of the adjustments carried out by the group.

As we stated at the start of the article, standardisation is a very technical step. Consolidation accountants who track it accurately and meticulously will avoid many problems when reconciling consolidated shareholders’ equity.

Given this, the use of a consolidation software application which enables the most automated and transparent renewal of adjustments possible will provide an effective way to facilitate and accelerate the consolidation process and increase its reliability.

This article is the last in a series of 4 articles.

To read the other articles in the series:

 

Consolidation using a spreadsheet versus consolidation software

“I currently do my consolidations on a spreadsheet. When will it become necessary to invest […]

Download the white paper
Share this article :
Discover Sigma Conso Consolidation & Reporting
Sigma Conso Consolidation & Reporting is a consolidation software package which unifies statutory consolidation and management reporting to provide a single version of the truth. The software is multilingual, multi-standard and multi-currency to meet the needs of international groups.
Recent articles
How can you prepare for a job interview as a consolidation consultant? By Alain Stubbe, […]
Automating data collection and improving data quality for better group reporting As a supplier of […]
X