What is financial consolidation? A guide for 2024

Financial consolidation is a common term in accounting. But what does it mean? There are many terms, steps, and methods involved with financial consolidation, and figuring out how to get started can quickly become overwhelming.

This complete guide to financial consolidation covers the basics, some frequently asked questions, and best practices, including:

Financial consolidation basics

Let’s begin with the essentials of financial consolidation and compare it with other commonly misinterpreted financial terms.

Financial consolidation definition

Financial consolidation combines financial statements including assets, liabilities, and other financial items from multiple entities into one. In an accounting context, consolidation refers to subsidiary entities owned by a parent company.

What is the main purpose of financial consolidation?

The main purpose of financial consolidation is to provide an at-a-glance view of the overall performance of a parent company plus its subsidiaries. This view is effective for high-level reporting, financial planning, and forecasting, and for ensuring regulatory compliance standards are met.

Why is financial consolidation important?

Financial consolidation provides essential insights into a company’s performance by accounting for subsidiaries to accurately represent its finances. This can have a huge impact on strategic decisions.

Financial consolidation example

Parent company A has $2,000,000 in annual revenue, and $750,000 in assets making up their financial statement.

Subsidiaries B and C each report revenues of $1,000,000 and $400,000 in assets.

Reporting solely on the financials of parent company A wouldn’t accurately represent all its revenues and assets. Financial consolidation takes the combined total of parent company A, and subsidiaries B and C, for a complete consolidated picture.

Challenges of financial consolidation in accounting

With any organization-wide process, there are challenges to consider. Financial consolidation is no exception. Consider the following before building your consolidation strategy:

• Data quality errors: Are all entities using the same method of data entry? Are there inconsistencies with data processes that might affect your reporting?

• Lack of automation and human error: If you’re completing your financial consolidation without software, consider the consequences of a lengthy consolidation and human error.

• Changing reporting requirements: Reporting requirements could change at any time based on your organization's needs or compliance requirements within your jurisdiction.

• Complications between countries and foreign currencies: Are the processes for collaboration with international subsidiaries and currencies consistent across all entities? Reconciling this data efficiently is crucial for big-picture reporting.

Financial consolidation vs. business consolidation

Business consolidation is the combination of multiple smaller business entities into one larger entity, whereas, with financial consolidation, the subsidiaries and parent company remain separate entities.

Financial consolidation vs. consumer debt consolidation

Consumer debt consolidation is combining multiple debts into a singular payment plan, usually monthly. Whereas financial consolidation is the process of combining financial statements across multiple business entities.

Financial consolidation vs. financial close

Financial close is the finalization of finances at the end of an accounting cycle. Usually, a financial close happens when accountants “close the books” after a fiscal quarter or year. Financial consolidation is combining financials from multiple business entities.

What are the key accounting consolidation steps in the financial consolidation process?

The process of financial consolidation can be broken down into just a few steps.

1. Collect your accounting data

To collect accounting data from multiple entities, using specialized software, like a Financial Performance Platform, is your best bet. This way, you can automate the collection process and have all your data within a single source.

2. Map the accounting data onto a chart of accounts structure

A chart of accounts (CoA) is an index that cleanly lists all transactions a company has made within a specific fiscal period. Mapping accounting data from all entities into this structure gives an organized view of your financial health.

3. Apply foreign exchange rates

Apply foreign exchange (FX) rates to the applicable data points on your consolidation sheet.

4. Eliminate intercompany transactions

Intercompany transactions should be omitted from financial consolidation, so remove them where necessary.

5. Verify cumulative translation adjustments

Cumulative translation adjustments (CTAs) are the discrepancies on a balance sheet from conversion rate gains or losses created by exchange rate variations. Ensure your CTAs are up to date.

6. Generate consolidated financial statements and report consolidation results to stakeholders

Use this consolidated data to generate a streamlined financial report for stakeholders to easily digest. Clarity and visibility of financial health are crucial in this statement.

What are the different methods of consolidation accounting?

Mapping the key consolidation steps is simple, but keep in mind there are multiple methods of consolidation accounting.

Full consolidation

Full consolidation is the most closely tied to the definition of financial consolidation. The parent company generates a report of all the combined financial statements from subsidiary companies, if it holds a majority share or can demonstrate significant alignment in leadership across entities. The subsidiary company’s statements will include expenses, assets, revenues, liabilities, and more.

Consolidação proporcional

Proportionate consolidation represents a percentage of the assets and liabilities of a subsidiary company on the balance sheet of its parent company. This method was made obsolete in 2013 and was replaced by the equity method.

Equity method of consolidation

When a company owns a minority share in a subsidiary (i.e. 49% or less), the equity method is used to consolidate financial statements. The investor company will report its share of the investee's equity as an investment at cost.

What are consolidated financial statements?

With consolidation steps and methods mapped out, let’s review the different types of consolidated statements.

Consolidated income statement

A consolidated income statement can also be referred to as a consolidated statement of operations. The summary of the total expenses and total sales revenue make up the consolidated income statement. This statement reflects a specific financial period like a predetermined financial cycle or fiscal year.

Consolidated balance sheet

A consolidated balance sheet can also be called a consolidated statement of financial position. The financial statement detailing the financial position of a parent company and all subsidiaries combined is a consolidated balance sheet.

Consolidated statement of cash flow

A consolidated statement of cash flow might also be referred to as a consolidated statement of changes in funds. A consolidated statement of cash flow reports the effects of an entity’s changes in cash flow over a defined period. Just like financial consolidation, a consolidated statement of cash flow reports for a parent company and all its subsidiaries.

Financial consolidation software examples

Because the financial consolidation process is so involved, opting for finance-specific software will ensure an efficient and simple process. Here are a few examples of financial software solutions for financial consolidation.

prophix

Prophix One, a Financial Performance Platform, was built with your financial consolidation needs in mind. Offering a performance-based platform to simplify any financial process, Prophix One is equipped to help with financial consolidation, intercompany management, financial close, ESG reporting, and anything else your organization needs.

Prophix is also made with scalability in mind, offers a vast resource library, and has top-notch customer support.

Vena

Vena is another option for financial consolidation. Vena offers features like financial reporting, sales performance management, and financial close management in an Excel-based interface.

Centage

Centage is financial consolidation software made for small to mid-sized businesses. Centage offers features such as automated forecasting and budgeting, scenario modeling, and customizable dashboards.

Benefícios do software de consolidação financeira

1. Faster data collection + validation: Manual data collection can be time-consuming, especially if there are many entities under a parent company. Validation can also be tedious and automating this process will cut the time spent expeditiously.
2. Less human error: Consolidating manually would require not only an exorbitant amount of time, but it would be such meticulous work that it would leave a substantial amount of room for human error.
3. Automate time-consuming tasks like journal creation: Aside from manual data collection, a large amount of time would also be spent appropriately logging transactions, record-keeping, creating journal entries, and maintaining the records of statements.
4. Analyze consolidation analytics: Once you’ve consolidated the data, extracting findings would be another layer of manual work for your team. Financial consolidation software can automate this process and make it easier to identify trends.
5. Streamline reporting: Financial consolidation software is built specifically to deliver reporting quickly and effectively.
6. Better compliance with IFRS or GAAP standards: Compliance standards can change at any given time. Ensuring you have consolidation software that can meet compliance standards will save your team time and prevent speed bumps down the road.

How to automate financial consolidation with Prophix

Finding financial consolidation software to suit your team can seem daunting. That’s why Prophix has all your team’s financial consolidation needs covered. Key features include:

1. Exchange rate management: Skip the tedious work of calculating exchange rate and FX discrepancies.
2. Elimination journal creation: Eliminating journal creation and other means of record-keeping are crucial for your team. Prophix One can streamline this process to save you time.
3. Consolidation analytics: Accessing detailed analytics is key for an effective financial consolidation report. Prophix One can present your data in such a way that your findings are clear for all stakeholders.

Want to see how financial consolidation software compares to spreadsheets? Read our blog!