How to best organise your initial consolidation?
With markets focussing on international development, business environments are changing rapidly and becoming increasingly complex. Mergers and acquisitions occur every day and companies seek funds to finance the expansion and ensure their future.
Globalisation is forcing companies to re-think the organisational structure and to develop new competences in-house. These pressures are resulting in more and more companies being confronted with consolidation issues.
While financial (or management) consolidation sets off as a, not even that complicated accounting technique, properly designing and implementing your consolidation process requires sufficient insight into both the group reporting requirements, the group structure as well as how (business) activities are organised throughout the group itself. Properly kicking off your consolidation process, allows you to cope with future changes of the group-structure, the group-reporting or the people involved, in a swift, efficient and correct manner.
A solid preparation and proper organisation of the group consolidation process are equally important to the success of the group consolidation, as reporting the data itself or even processing the numbers in the consolidation.
So, what are the crucial steps you should not miss in setting up the group consolidation process?
Set out your time-line
Installing a consolidation process throughout the group cannot be done overnight.
Consulting the different stakeholders to discuss and look for the best solution, enabling them to take decisions with an eye on the future evolution and strategy of the group, will take time. From there, defining and implementing the consolidation process as well as training the people involved, obviously requires proper planning and follows a step by step approach.
Train the contributors
Even when opting for a full outsourcing of the consolidation process to an external party, training the internal people contributing to the process, will increase the success and efficiency of the consolidation process. A proper understanding of what is expected, by who and when, is a key success factor. Target to install transparency with everyone contributing, is key so that people understand what is expected from them and to what it should contribute.
Conclude and communicate on objectives
The approach and design of the group-wide process will differ depending on the specific objectives for installing a group consolidation reporting. Is the legal obligation driving the financial consolidation, or is there an ambition to evolve from an operational margin or EBIT driven management consolidation towards a more complete group reporting, targeting to gain insight into the consolidated capex demand and working capital review?
Do you need to consider demands from external stakeholders providing information on covenants or total net debt?
It’s of utmost importance to agree on the different information angles that are required from the group consolidation reporting.
Define the Group accounting principles
Define if the group consolidation should be set up according BEGAAP or IFRS rules.
Consider how any local accounting standards installed throughout the group may be impacted by the translation into a common set of accounting principles and how the local requirements can be addressed in parallel with group reporting standards. Define if an ‘economical’ view on the management consolidation may require data to be viewed in multi-GAAP setup, and how to facilitate the reconciliation.
Define the Group reporting
How does the desired reporting output format(s) look like? Do you consider a fix and table BEGAAP format or do you target international reporting standards or more management driven and analytical detailed information within the group reporting?
Depending on the choice the impact on the accounting and reporting system will differ as well as the minimum required dataset from each of the contributing affiliates.
Organize the intercompany reconciliation process
The process of reconciling the intercompany positions throughout the group is only a small step in the overall consolidation process, nevertheless this is a typical hurdle in most of the groups. As such if the process is not properly organised with clear accounting instructions, reporting timings, roles and responsibilities respected with sufficient discipline, even the most state-of-the-art technological platform cannot prevent that merely reconciling intra-group positions endangers the outcome of the group consolidation.
Choice between DIY excel approach or engaging with a reporting software
In every group finance organisation, the initial ‘escape’ will be to consider the use of excel to perform the consolidation. Some groups might even see the accounting software as a proper solution to process the consolidation. While we can, in some cases understand, the benefit of starting with excel as an initial solution for a small and non-complex scope, the consideration of using any regular accounting ‘platform’ is not advisable.
When using excel, please consider that next to the DIY flexibility that excel offers, there are a lot of downsides to this choice. Processing changes in both data or structures, auditability of the outcome and posting correction journals as well as the consolidation eliminations are only a few points where even the most advanced excel users will struggle with. Specific consolidation complexities such as applying mixed foreign currency rates and methods (periodic)average – closing balance- or historic rates) or calculating minority interests to name a few, demand a specific solution designed to facilitate the challenge rather than a spreadsheet miracle.
Setup, test and audit of the initial consolidation
In order to avoid surprises, as with any challenge, proper testing is key to the successful outcome. No matter how state of the art the final solution may be or not be, a proper dry-run is unavoidable.
Once the process and solution has been properly reviewed, you will first engage with the consolidation of the opening balance, which will need to be reviewed thoroughly even by your auditor. The consolidated opening balance is a key starting point for evaluating not only the opening positions, but also the transparency of the reporting process and its outcome.
“A good start is half the job done”, is for sure valid in this multi-step process of groupwide consolidation, engaging with the different layers within the group. Next to a timely start, proper communication, a future proof vision and sufficient consideration for the multi-stakeholder engagement are key success factors. Keeping an eye on the points of interest for both the subsidiaries as the HQ demands, internal and external parties with an interest towards the outcome of the group consolidation reports is crucial as well and demands involving both business and finance colleagues as well as the IT staff (up to board level).