Consolidation solutions for small and medium enterprise company groups

A growing number of companies have been integrated into domestic as well as international company group structures. These days, the increased complexity of the business landscape can only be managed properly with automated IT architectures, because the quarterly and/or annual reports of the parent company and those of the subsidiaries as well as the consolidated financial statement of the company group are closely intertwined with one another and must comply with complicated domestic and international regulations. Be it the company group management, the equity controlling, or the shareholders: at the end of the period, being able to trust the figures is a must. This repetitive laborious work can be automated with corresponding consolidation software -- for the most part. The following depiction indicates the most important functionalities that such software must feature.

Harmonisation of the internal and external rendering of accounts

Internal and external rendering of accounts are subject to different requirements. Standardised terminological foundation, a standardised degree of detailing, and a standardised understanding of file contents are necessary to be able to map a system. In particular, it is only this way that the equity controlling can satisfy the information requirements of executive management and provide for the controlling instruments.

IT support for the consolidation

Data warehouse architects have proven themselves successful as basis for the consolidation. Whether traditional Business Intelligence frontends are necessary, or special consolidation software, must be checked on a case-by-case basis.

Organisational tools and data capture

At the beginning of a consolidation solution implementation project there is the development of organisational tools. In addition to a consolidation handbook, a company group system of accounts must be developed with which all issues of the external and internal accounting can be mapped.

The values of the individual companies booked in accordance with local regulations must be adjusted to the standardised preparation and assessment of a company group balance sheet. The data transfer from the local bookkeeping systems into the consolidation software becomes even more important the more sophisticated the system of accounts of the company group is.

Currency conversion

In the conversion of currencies it must be taken into consideration that, on the one hand, the exchange rates to be applied are provided by a centralised unit, and on the other hand, that the respectively required conversion methods are taken into consideration.

Partial company group structures

Depending on the structure of the group company it may be legally required or desirable for internal controlling reasons to map partial company groups separately. If only the consolidated financial statement of the parent company is desired, then - for simplification reasons - a flat mapping of all subsidiary companies next to each other can be selected (simultaneous consolidation). Otherwise a step consolidation with partially consolidated financial statement of the subgroup is necessary.

Consolidating entries

The individual accounts of the companies, converted to the corporate currency are consolidated.  This is followed by the actual consolidating entries. With the help of capital consolidation, debt consolidation, expense and income consolidation, as well as the elimination of interim results, the equity assessment, and of the taking into consideration of latent taxes, the consolidated accounts are developed into the consolidated financial statement. With the consolidation solutions offered, it is in any case necessary to adjust the implementation to the respective situation in the corporate group.

A fundamental question in the design of the IT support is to what extent the capital consolidation is to be carried out completely or in part by machine. Quite often, comprehensive additional reporting data and external reconciliation tables are necessary due to the real-life complexity and dynamics of structures under company law.

The area of inter-company setoffs, i.e., debt consolidation and expenditure / income consolidation is also of great importance for the design of the IT support. The consolidation software often requires parameters such as partner companies, types of transactions, transaction currencies, etc., in order to carry out the consolidation measures.

Segment representations

While in the past different companies were consolidated, now a separation into different business units and/or segments or regions has to be reviewed. Depending on the requirement (legal or internal), the representation of the segments can look differently. The German Commercial Code (HGB) requires, at a minimum, the breakdown of the sales revenues. However, quite often a further segmentation is necessary.

Cash Flow Statement

The necessary cash flow statement can either be prepared via the consolidation of the company‘s cash flow analyses or via a direct determination. The usual method used is a direct determination from the data in the consolidation solution. For this, additional information is in part necessary that has been obtained from the individual companies.

Reports

Required reports for the legal component of the consolidation are the balance sheet, the profit and loss statement, the statement of changes in non-current assets, the statement of changes in equity, the statement of provisions, the segment reporting, a listing of additional data, and the cash flow statement. Due to the multitude of possible issues, a powerful reporting tool which can also be operated by users is necessary for internal reporting.

Audit of the consolidated financial statement

A legal consolidated financial statement also includes the audit of the latter by an auditor. It should be agreed upon with said auditor which materials and documents are to be provided as proofs. In addition to the mandatorily required accounting journals, an audit trail has proven helpful in which the development of the individual companies is represented from the consolidated accounts and the various consolidation types to the consolidated financial statement, as well as - for example - an investment register in which the essential data of the companies included is depicted.

Internal control system

The preparation of a consolidated financial statement should - as a process - be integrated into a well-structured internal control system (ICS). This ICS starts at the user administration of the consolidation software. Automated controls should be executed directly at data entry and/or data import. This must include comprehensive verifications of the reliability of data and data combinations.

In Summary

In summary, it can be said that corporate accounting and  controlling each have different requirements for the consolidation software that are to be mapped in a single system with a standardised data maintenance system. These requirements must be coordinated in detail prior to the implementation of an IT-based solution. In addition to the internal departments, the company group auditor and - where applicable - also the auditors of the subsidiaries must be included in this coordination.

The selection of the consolidation software must take these diverse points of view into consideration. Establishing a powerful data warehouse is the fundamental prerequisite for everything.

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