What is Financial Consolidation?

What is Financial Consolidation

Financial Consolidation is an important part of reporting a business or corporation’s financial performance in a given fiscal year. Sometimes, people get the term “financial consolidation” mixed up with “debt consolidation” which is a completely different term altogether. Debt Consolidation deals with combining balances from different debtors into one large debt to pay off. Financial Consolidation deals with the business of combining as well, but in accounting terms, the combining of financial statements from different companies.

This combining process deals with presenting a singular financial statement that reflects the totality of a parent company with many subsidiary companies. Just as an example, The Universal Music Group is a media conglomerate which owns several other media companies such as Geffen Records, Capitol Music Group, and Interscope Records. To reflect the financial performance of Universal Music Group as a entity, financial consolidation must be performed to cull the data from every single company under its’ umbrella.

What is the Financial Consolidation Process in the Accounting World?

Using the example company above, we can then observe the process that takes place within a financial consolidation. Universal Music Group has an entire department of accountants which is headed by a CFO, or Chief Financial Officer. This team of accountants will painstakingly go through financial data using GAAP or Generally Accepted Accounting Principles. GAAP is the standard by which all accountants and bookkeepers use to compile their data in an accurate and ethical manner.

The first order of business is the arduous task of collecting and assimilating data from all companies under the corporate umbrella of Universal Music Group. The corporation has 15 record labels that are under their ownership and most of these record labels are umbrella companies themselves. What this means is that there are potentially over 100 different subsidiaries to cull the financial data from. This requires time and patience and the aforementioned team of accountants to retrieve and gather the data.

The accountants will go through expense accounts, revenue sheets, equity, liabilities, and assets from each subsidiary company. Currency conversions must also be part of this process as some companies are located in different locales and regions. Internal reconciliations must also be accounted for as sister companies sometimes sell goods and services to each other. Manual adjustments and eliminations may also be performed during the data compiling process to scan for possible duplications and also account for other interbusiness ventures such as dividends and investments. A final financial statement for Universal Music Group will be compiled from the vast amounts of data from their subsidiaries. This statement will reflect on the overall financial health for the fiscal year for Universal Music Group. This statement will be reported to all current stakeholders as well as to the SEC (Securities and Exchange Commission).

Why is Financial Consolidation important?

The process of Financial Consolidation is vastly important to an organization for three main reasons. First, financial consolidation provides a snapshot of the corporation’s financial health and this data is vitally important for potential companies and investors. Let’s use Warren Buffett as an example, Buffett is well-known for his main company Berkshire Hathaway. Buffett makes investments with client’s money into a myriad of stocks, bonds, and other companies. Before investing money into a company, Buffett will first look at a company’s financial statements. These statements created through the process of financial consolidation will clue Buffett in as to whether he will make the investment or not.

The second reason for financial consolidation is a legal one, all companies are required by the SEC and GAAP to provide accurate data for financial statements. The IRS (Internal Revenue Service) also has this requirement put into place for accurate recordkeeping and proper taxation. There have been famous missteps within these practices as corporations such as Enron and the accounting firm aiding these scrupulous methods (in Enron’s case, Arthur Andersen Inc.) have all run into serious legal repercussions due to these practices.

Lastly, financial consolidation paints an overall picture of the corporation and staying with the painting metaphor, each brush and color used represents each subsidiary company under the corporation. During the data retrieval process, a corporation can easily see which subsidiary is doing well or which ones are not. Because of Financial Consolidation, a corporation can use the information from their subsidiaries and sell off a company that is dragging the overall numbers down.

How are companies tackling Financial Consolidation today?

Companies are using traditional methods of record keeping such as journals, spreadsheets, and ledgers to keep their financial data. The actual medium that these spreadsheets are on is down to the size of the company and the resources available. Typically, your basic “normal” business, be it the mom and pop gas station down the street or the local small business will usually hand-write the data in manually on journals and other tools. Your larger businesses and corporations all use computers to achieve this aim with a cleaner and more detailed look to the data.

The advantages of using computers and ERP (Enterprise Resource Planning) systems to record-keep are immense as data retrieval and duplication is much easier this way. One could simply email .xls files or pdf files to another bookkeeper instead of the old-school way of individually copying each sheet and dispersing them that way. Computers are also ideal in the event of an IRS audit as printing off or emailing a report and subsequent financial sheets are easier to absorb and look at versus bringing a box of records and hand-drawn reports.

Related :What is Enterprise Performance Management?

What does a modern approach to Financial Consolidation look like?

Corporations today are already looking forward to the next evolution in the financial consolidation methodology. This evolution involves dedicated financial consolidation software which provides the time-intensive process of data compiling and presentation with just a single mouse-click. The amount of time saved with using dedicated software and workflows frees up the Accountant to attend to other pressing financial matters and responsibilities. Employing a dedicated financial consolidation software plan brings automation and simplicity to the process and will be a benefit for companies going forward.

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