08 Nov Financial Consolidations Demystified
Assembling data, validating it, and reporting on it can be a tedious procedure. When one thinks of financial consolidations, we often think of a process that could take months or weeks, depending on the size of your business. The thought of it being a process that could simply take days seemed farfetched until now. However, modern accounting and business management systems streamline financial consolidations. Here is a quick guide. Financial Consolidations demystified.
What is the purpose of consolidated financial statements?
Consolidated financial statements group together all the related entities (locations, divisions, subsidiaries, legal structures, etc.) that are under a single parent company’s control. It gives the reader a unified “operational” view of the consolidated entities.
The financial stakeholders of the parent organization want and need to understand how management has allocated capital and resources into the various lines of business to generate a return. Consolidation eliminates all inter-group activities and balances to report transactions with external third parties as if the entire group of companies was operating as a single entity.
Different legal entities (e.g., companies, partnerships, funds) are created by a parent company for a range of reasons and purposes. Some are legally driven (e.g., limited liability), others are tax-driven (e.g., optimizing the tax profile), and yet others are strategically driven (e.g., international expansion, mergers, and acquisitions). Regardless of the origin of these entities, it doesn’t take long before the corporate organizational chart begins growing tentacles of various subsidiaries and subsidiaries of subsidiaries.
The pace and complexity of today’s business environment are driving financial executives to shift their financial management solution to a system of intelligence rather than a system of record, a critical part of which is access to continuous, accurate, consolidated financial reporting.
If consolidated financial statements are the desired and necessary outcome to meet stakeholder and regulatory reporting needs, then working backward, we can chronicle the consolidation process and discuss the challenges of aggregating the balances and transactional activity from the business units. This will set the stage for discussing an approach for improving not only the financial consolidation process but also augmenting the analytical and real-time reporting capabilities of the finance function.
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