The accounts consolidation process: are you ready for it?

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The accounts consolidation process: are you ready for it?

Legal requirements and the need for relevant information are becoming omnipresent in an increasingly complex and competitive economic and financial world experiencing a systemic crisis.  Given this context, the preparation of consolidated accounts and their presentation to various market stakeholders is a process that an increasing number of groups are having to deal with.

The restructuring, development or extension of the group, a call for public savings, the arrival of new investors, a change in legislation…  Any one of these can push or compel companies to communicate financial information that must meet criteria for correctness, precision, relevance, comparability, transparency and timeliness on a consolidated basis and potentially using different accounting standards (for example: IFRS, US GAAP,…).

The goal of consolidated accounts is to provide a picture of the assets and liabilities, finances and results of group companies as if they were a single entity.  Account consolidation is required for providing information externally and as an internal management and decision-making tool.

The consolidation process cannot be improvised and requires the implementation of a well-thought out approach suited to the groups that are implementing it.  All of the steps involved including the definition of the scope and the involvement of the companies that make it up, the design of an ad hoc consolidation package, the definition of accounting standards and group evaluation rules and the production of the final version of the consolidated accounts require careful consideration and thoughtful decisions on the part of management.

The legal framework, the size and style of the group, the use or purpose of the consolidated information and the granularity of analysis sought are all key factors that will condition both the overall consolidation process and the selection of a software processing and support tool.

Let’s analyse a few key steps of the process:

The scope of consolidation

Defining the scope of consolidation raises some difficulties.  The holding percentage alone is often not enough to determine whether the group has exclusive or joint control or significant influence over acquired and incorporated companies.   Recourse to more factual concepts is often very helpful and can reveal that some conclusions were reached too hastily.  It is in this direction that IASB are moving with IFRS 10 (issued in May 2011) which revises the concept of control, among other things.  In any event, the analysis will lead to a decision on whether or not to include a company in the scope of consolidation and, if it is, based on which method.  Next, the issue of consolidation by sub-group (or step-by-step) and of direct consolidation by the parent company of the group companies can be addressed.   The two approaches are valid and each has advantages and disadvantages.  For example, step-by-step consolidation is required when a sub-group has a legal obligation to file consolidated accounts at its level.  The direct approach makes it easier to see the contribution of each company to the consolidated whole. This is not the case with the step-by-step approach in which individual contributions are more opaque.

Other items of the scope, such as the existence of cross and circular holdings which are normally processed automatically by a consolidation software tool can be determinant for the selection of a tool.

The consolidation package

The design of the package is also very important, all the more so because this document and its appendices will provide the base data that will be injected into the selected software tool.  Regardless of how effective it is, the tool will not be able to re-create complete and relevant information if the data available to it doesn’t meet the same criteria to a certain extent. The package includes all of the quantitative data and a significant amount of the qualitative information that the parent company must consolidate.  Depending on the legal framework, the package must also fit a suitable structure that will enable it to feed into a consolidated accounts scheme required by law. This legal aspect can cause some problems for international groups which can have very diverse activities and for which foreign currency management must also be included. Lastly, it is also within the package that questions about inter-company relationships and transactions must be addressed.   The accounts that will be impacted by transactions between group companies must be identified very early on given that this will condition the parametering  of the package as well as the processing (centralised in the parent company or decentralised in the group companies) of the reconciliation and the elimination of the transactions.

It is therefore essential to anticipate local specificities and issues since they will impact the design of the package both at the quantitative level and with respect to the information provided in the appendices. The information provided in the appendices should not be neglected given that they will contribute considerably to the writing of the notes of the final consolidated accounts.

It is also a requirement to have a computer tool that is flexible (interfacing of statutory data with the consolidation system), practical and which includes a set of powerful controls.

Homogenisation of accounting standards

The determination of valuation rules and methods at the group level is also a required step that must be taken into account for the process of accounting standards homogenisation.  In fact, it is very rare that all of the companies of a same group use the same valuation methods and rules. Based on the local standards framework and the choices made by the various companies, corporate accounts will have to be re-processed to ensure their homogeneity with group standards.  It is therefore essential that re-processing be carried out in the most effective and transparent way possible.  Given this framework, a tool that provides a crystal clear view on statutory data, on the re-processing of local standards and on re-processed data will provide undeniable visibility into this step of the process at the consolidator, internal controller and external auditor levels.

The few examples above, taken from a traditional consolidation process, clearly demonstrate the complexity of account consolidation and the technical skills required to successfully implement it.  As a result, it is essential to acquire the necessary know-how, to call on specialists to validate opinions and, depending on the case, to invest in a reliable, effective, flexible and practical software package or to opt for external processing.  This choice must be made after giving in-depth consideration to issues including, among other things, the legal framework, the size and style of the group, the type and degree of precision of information needed, the type and depth of analyses required and the group’s budgetary constraints.

In conclusion, it will be up to management, supported by experienced consolidation experts, to anticipate and invest in order to ensure that the process, which is much more than a legal constraint, becomes an essential management and decision-making tool.

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