3 Best Practices in Financial Consolidation Reporting
For large companies with multiple subsidiaries, the best way to convey accurate financial information to investors is through consolidated reporting. Combining the accounting data from all offshoots of a corporation is a
For large companies with multiple subsidiaries, the best way to convey accurate financial information to investors is through consolidated reporting. Combining the accounting data from all offshoots of a corporation is a major undertaking, and best practices should be followed to ensure a faithful representation of the health of the company.
Accounting Standards: Accountants should begin the consolidation process by reviewing the standards set by U.S. agencies and, if applicable, international agencies, to determine the necessary information to include in the reports. Upcoming International Financial Reporting Standards favor consolidated reporting, and the International Accounting Standards Board recently released additional guidelines for the practice.
Effective January 1, 2013, IASB will change the standard regarding whether a business can be consolidated by changing the definition of the term "control" under IFRS 10. According to the new standard, "an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. This principle applies to all investees, including structured entities."
Packaged Applications: Packaged, or "best-of-breed," applications are a popular tool for consolidating financial reports, according to business analysis provider Oracle. These types of applications can automatically aggregate monthly or quarterly results, and structure them in accordance with the rules, procedures and standards set by IASB and IFRS.
These solutions are also handy for data analysis, and allow managers to revise existing corporate structures and model new ones, as well as collect a variety of environmental and social metrics that are important for non-financial aspects of an investor report.
Inter-company Consideration: Special attention needs to be paid to inter-company sales, receivables and stockholdings in order to give the impression that the report details the holdings of a single company, according to the University of California-Berkeley. Under generally accepted accounting principles, companies must give special attention these types of internal transactions in consolidated reports.
The reason for the distinction is an exercise in logic: A company can't make money selling assets to itself, and therefore those sales should not be counted in year-end reports. Similarly, a company cannot report investments made in itself through inter-corporate stockholdings, or be in debt to itself, according to UC-Berkeley. To achieve the appearance of a single corporate entity, the university recommends "identifying the treatment accorded a particular item by each of the separate companies," and "identifying the amount that would appear in the financial statements with respect to that item if the consolidated entity were actually a single company."