Contribution view in consolidation: an added value
The purpose of this article is to focus on one important feature which is expected to be found in professional consolidation software: the contribution view.
What is a contribution view?
Considering a consolidation scope containing 10, 20, 50, … companies and maybe more, a contribution view shows “in a single click” all the individual companies contributing in a consolidated line of the balance sheet, the P&L, the cash flow statement and more generally in any notes to the accounts.
This function appears to be a very powerful tool to analyze a quite large set of figures. The following examples explained hereunder have been picked up from real life out of many different groups in many different countries.
The “black box” problem
When a group acquires a subgroup of reasonable size in number of new companies, there are generally two options
- Either this subgroup produces first its consolidated accounts which are then consolidated in the final group;
- Or the acquirer group decides to enter in its consolidation scope each individual new company.
By integrating already consolidated figures of a subgroup in a consolidation of higher level, the contribution view is rather limited. We see one amount for the whole subgroup and nothing else. No detailed information about all the companies belonging to the subgroup. They remain in a black box and the only way to see more is to ask additional information. When CFO and Auditors are asking such information, expecting a quick answer, you can feel yourself in a bad position. That’s the reason why, the option to consolidate directly all the companies is highly recommended, offering then an immediate detailed view on all companies by the contribution function.
Auditors analysis: select “strange” companies in a glance
Most of the Auditors begin their audit with a limited number of reports: Consolidated balance sheet and P&L and … the contribution view on these two documents.
Why? They scan the lines of the balance sheet and once they notice an abnormal variation, they naturally skip to the contribution view to analyze which companies are contributing to that variation.
Such a view saves the time of the Auditors and, moreover, if a more detailed analysis is required, they can ask the consolidation adjustments for this limited number of companies. This is what we call the audit-trail approach.
If we combine the contribution view per company with the contribution view per journal, this results in a highly precise analysis tool, which can help answer auditors’ questions, e.g. explanation of the transition from local accounts to consolidated accounts per entity.
Change in consolidation scope
Most of the time, external observers to the consolidated accounts are sometimes surprised by some important variations between two consolidated periods. Not only Auditors, but also CFO …
The contribution view generally brings the answer immediately by showing that the important variation is simply coming from
- A new company consolidated for the first time this period
- An existing company that has been disposed to 3rd Parties
- A change of consolidation method between current and reference periods
The “Hit Parade” contribution view
One can imagine that a contribution view is manageable for consolidation scope of reasonable size. Of course, when a group reaches for instance more than 100 companies, it becomes difficult to identify some companies needing an audit-trail analysis.
In some professional consolidation software, the contribution view can show a limited number of companies, for instance the 20% of the companies contributing to 80% of the amount.
Some other features like the possibility to get a contribution presentation of the companies sorted not only on their names, but on the current or reference amounts, or the variation amounts between the two periods, bring a very high level of added value for anyone analysing the figures.
Contribution behind intercompanies
At the end of the consolidation process, accounts show a net value reflecting only impacts of transactions made with the outside world.
One of the most interesting accounts is the turnover account. Generally we know what the statutory turnover of a company is but, after intercompany eliminations, sometimes, it is reduced to a non material amount.
That’s a rather realistic and sometimes surprising picture brought by a contribution view.
Contribution on statutory amounts or adjusted amounts
With this contribution function, a consolidation software would certainly offer a higher efficiency for analysis.
Because, considering a company contributing in a “strange” way to a certain line of the balance sheet, we must admit that the origin could be either the statutory amount or some consolidation adjustments.
A kind of swap contribution function between these two amounts will be very quickly fixed by the persons analyzing the figures.
Using a contribution view will definitely help to answer questions such as: at what price should I sell this entity to have no impact on the consolidated P&L?
In the most general case, consider the book value of that participation, view its contribution in the consolidated reserves, and add both amounts and you get the answer!
Segment information for IFRS
If each group company can be fully classified depending on its activity, its geographical location or any other criteria, a smart contribution view would show the importance of these segments in a first level and a breakdown into companies within each segment in a second level.
Such segmented information brings an original and interesting point of view on the consolidated figures and furthermore IFRS makes it mandatory.
Contributive presentation of consolidated accounts to the Board and Auditors
When consolidation is ready for audit, there is generally an internal presentation of the figures to the Board and the Auditors. Such a meeting is organised in a way that the figures are displayed on a screen and when one of the attendees needs a more detailed information, we display a double contribution view presented as a matrix.
One each line of the matrix appear the contributing companies of the group and in each column appear the contributing accounts to the considered line of the balance sheet (or P&L).
When we reach the last line of the balance sheet and the P&L, an important part of the audit is already done!
Contribution and notes to the accounts
During the same session as explained above, the contribution view on lines of the balance sheet, P&L and cash flow statement highlights the most important events that will be described with some details in the consolidated disclosures.
Again, important part of the notes to the accounts is done.
The volume of information, the number of companies in a group, some complexity because of the number of consolidation adjustments, several changes in the consolidation scope … make difficult to analyze and identify the most important situations without loosing time in details.
A very efficient contribution view offers the opportunity to focus on the important issues.
This contribution view becomes a key point in a “fast close” strategy and a must while considering the purchase of a new consolidation software.
But keep in mind that the most marvelous consolidation software with a smart contribution view will have no added value if the consolidation methodology doesn’t rely on one basic principle: all adjustments must be booked in each concerned company and not in a “dummy” or “top” company!