Consolidation bundle: determining factor in the consolidation process
The consolidation bundle is an essential element in the consolidation process, as well as setting the correct scope. Both will be influenced by the GaaP under which the consolidation is done. Furthermore, the GaaP used for the group will probably be different than those used at the entities of the group and the output/reported information will thus strongly depend on the input/entry information of the process. This input will be determined by the form and the content of the consolidation bundle, showing how important it is to obtain homogenic, complete and validated data. Moreover, the data needs to be adjusted to legal requirements and to management needs for analysis.
Three main elements for drafting a bundle:
The structure of the consolidation bundle needs to be equal for every entity of the group. This uniformity is an important challenge for groups in which the activity of the entities varies a lot. The framework will be determined by the chart of accounts of the group and it is thus mandatory to define the account structure and a set of accounting principles for the group. As it is uncommon that every entity uses the same GaaP, and to facilitate work for auditors and consolidators, it is recommended to build a bundle that allows to trace the local adjustments to compare them with the Group GaaP. Using information structured in three columns (local information, adjustments and information in group standards) seems to us like the most efficient way to implement this. Setting up a mapping table between the local accounts and the group accounts also seems essential. A professional consolidation software will facilitate this work by interfacing directly with the accounting software(s) of the group.
Regarding the multi-currency issues that could arise, it seems appropriate to keep the local currency in the bundle for two reasons. First, the entity is not always familiar with currency conversions and secondly, these conversions should be automated in professional consolidation software. Furthermore, the use of the different currencies, even if they’re hundreds, will prevent rounding issues and will allow the entities to gain time by interfacing directly their local numbers in the bundle.
Finally, also the language of the bundle is important because it will be used as a communication method at entity level. It is obvious that a bundle in the local language of the entity is more comfortable for the accountants of those entities, nevertheless the investment of translating this could weigh heavily on a group that has entities everywhere in the world. That is why we recommend a bundle in only one language, the most used language in the group.
The content of the consolidation bundle should contain quantitative and qualitative information and can be split down into 5 parts:
The first component is general information such as the period, the reference period, general data about the entity, local currency, the names of the people concerned (accounting, financial manager, auditor, …).
The second component contains the local data presented in the accounting standard of the group. As mentioned in the part ‘structure’ in this article, the transition from the local accounting data to the information in group standards needs to be as transparent as possible. Adjustments should be part of a separate table in which all the necessary information is mentioned in order to understand the nature of the data and to ensure traceability.
The third component will contain information about participations and intercompany accounts in the group required standard. These reported amounts will be object of the analysis of intercompany transactions for which differences will be corrected in the reconciliation process.
The fourth component contains more information about the flows. In fact, it is essential to explain the variation of all balance sheets. The long-term flows will be more detailed than those who explain the variation of short-term accounts. Some examples of the type of flows we classically see: acquisition from third parties, intragroup acquisition, intragroup or third parties’ cession, currency translation differences, entry in or departure from the consolidation scope, … Information concerning the flows is essential for the implementation of a cash flow statement that is worth the name and for reports in the format of an evolution table, which is required in most of the accounting regulations.
Last, the fifth component will take, in the format of a table, a series of useful information to the consolidator, often required in the legal annexes of the consolidated accounts and depending on the level and analysis requirements of the management.
For example, this could include:
- Dividends received with mention of the entity who deposits and the number of titles concerned.
- Intragroup cessions and acquisitions of assets, together with information such as the company that sells, the one that buys, type of asset, gross value, depreciation, time of the depreciation, selling price, concerned accounts, …
- Required information about the staff of the group.
- Required information about the management team as well as their payments.
- Breakdown of the turnover in function of certain criteria (products, geographical areas, …).
- Relations with linked parties.
Moreover, it is important to stress that when information is detailed in one of these tables, it will encourage the coherence and accuracy of the bundle. This remark brings us to the third and last aspect of the consolidation bundle: validations.
The control rules depend strongly on the way the bundle is build. However, we can mention hereunder shortly several validations which seem vital to us:
- Validation of balances: total of assets = total of liabilities. Result on the P&L = result of the equity on balance sheet.
- Validation of opening and closing balances variation: opening balance + sum of flows = closing amounts.
- Validation of the consolidated participations account: the amount of the consolidated participations = breakdown of this amount by the entities held by the company and according to the group structure.
- Validation of accounts with subsidiaries: the amount needs to be superior or equal to the sum of detail informed by the entities. This validation will be applied to every account that could possibly have intercompany information.
- Validation between balance sheet flows and P&L flows, for example: variation of depreciations on balance sheet = allocation and amortization in liabilities. Or: subsidies on balance sheet = subsidies in products.
- Validation between flows, for example: exit of consolidation scope on asset = exit of consolidation scope on liabilities. Or: difference opening amount on asset = difference on opening amount on liabilities.
The notion of using validations is an ensuring element for the local accountant who fills out the bundle, because it provides a certain guarantee when it comes to the quality of information he/she sends to the consolidator. Regarding the last one, but also on level of the auditor, it is easy to understand that getting quality information will save a lot of problems and time during the process.
The conception of a consolidation bundle that responds not only to the specificity of the group in which it will be implemented, but also to the objective of homogenic, complete and validated data of the different entities, is not a task that requires improvisation. In fact, from that source of data depend the general elements to report at the end of the consolidation cycle and during every ulterior analysis done by the management. In this context, it is crucial to rely on high-performance tools and to surround yourself with professionals from which their expertise and experience will help groups save a lot of precious time while optimizing their consolidation process.