If you’ve got questions about financial consolidation for multi-companies, you’ve come to the right place. In this blog, we cover some of the most frequently asked questions we answer every week from companies worldwide. Whatever the size of your organization, it’s essential to know the fundamentals of financial consolidation if you plan to scale and grow.
Here’s a list of the topics covered (click your preferred topic to jump ahead):
- What exactly is a multi-company or multi-entity?
- Do all multi-companies require financial consolidation?
- Why is financial consolidation necessary for multi-companies?
- Can you keep track of each entity’s performance?
- How is information from separate entities treated when consolidating accounts?
- When should you consolidate financials?
- Do intercompany transactions appear on the consolidated financial statement?
- Do intercompany accounts receivable and payable appear on the consolidated balance sheet?
- What are the compliance regulations for consolidated financial reporting?
- Which accounting software is built for the financial consolidation of multi-companies?
Multi-companies are also known as multi-entities, which include a parent company (a holding company or conglomerate) with various subsidiaries and divisions. Some examples of the formation of a multi-company include:
- when companies acquire new entities through mergers
- when a parent company acquires another company
- when a company establishes independently structured international offices
Regardless of the industry, financial consolidation for multi-companies is required. Whether you are a small, medium or large organization, multi-companies need to consolidate financials for a period end to close their accounting records.
Financial consolidation is essential for several reasons. Some of these include:
- Accurate forecasting and strategic mapping of company goals
- Aligning entities based on key performance metrics
- Compliance with accounting standards ASC 810 and IFRS 10
- Ability to get an accurate picture of overall company health
- Convincing stakeholders to make strategic investments
The problem with consolidated financial statements is that they do not provide a separate view of the financial position of parent companies and their subsidiaries. Your company must have the ability to review the financials of each subsidiary separately.
Suppose you’re setting up your accounting processes post-merger or acquisition. In that case, it’s best practice to make sure it’s possible to separate financials and quickly and efficiently consolidate them for period ends. It’s possible to use software that allows for this kind of visibility while still allowing you to consolidate your financials effortlessly at period end.
That way, your company can track individual entities’ performance and invest strategically, rather than treating all entities the same. Companies will often see some entities perform better, so it’s crucial to be able to scrutinize and drill down into each subsidiary’s financials.
In consolidation accounting, the information from a parent company and its subsidiaries is treated as though it comes from a single entity. The cumulative assets, revenues, and expenses are recorded on the parent company’s consolidated balance sheet and consolidated income statements.
Accounting report regulations require the consolidation of the parent and subsidiary companies’ financial statements into one set of financial statements for the entire group of companies, regardless of whether the subsidiaries operate as separate legal entities. The subsidiary’s financials are reported on the parent’s statements in consolidated financials.
A multi-company business must consolidate when one company has a majority of the voting power in another company, with over 50% of the subsidiary’s outstanding common stock.
However, if the parent has minority ownership, it may still need consolidation accounting if the parent exerts significant influence over the subsidiary’s business decisions. Then consolidated financial statements must be prepared using the same accounting methods across the parent and subsidiary entities. These include the consolidated statement of income and the consolidated balance sheet.
The consolidated financial statements only report income and expense activity from outside of the economic entity. All intercompany revenues and expenses are omitted to avoid overinflating revenues and expenses.
Any revenue earned by the parent company at the expense of a subsidiary is omitted from the consolidated financial statements. This is because the net change in the financial statements is $0. The revenue generated between related legal entities is offset by the expenses from the related other legal entity.
Like intercompany transactions, intercompany account receivable balances and account payable balances are eliminated from the consolidated balance sheet. This is to ensure the intercompany balances are reported as a net of $0. All outside cash, receivables, and other assets and liabilities are reported on the consolidated statements.
Consolidated financial statements help multi-companies or multi-entities comply with accounting regulations, both locally and globally. As of March 2018, over 120 countries in the European Union (EU), Asia and South America use the International Financial Reporting Standards (IFRS). The U.S. still uses generally accepted accounting principles (GAAP).
IFRS is designed to bring consistency to accounting language, practices and statements, to help businesses and investors make educated financial analysis and decisions. IFRS sets the standards for transparency, accountability and efficiency for financial markets internationally.
In the U.S., the parent and subsidiaries still use GAAP for consolidated financial statements. GAAP consists of three important sets of rules:
- The basic accounting principles and guidelines
- The detailed rules and standards by Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB)
- The generally accepted accounting principles (GAAP)
ASC 810 and IFRS 10 contain essential guidelines for compliance
When it comes to compliance for the financial consolidation of multi-companies, the two most important accounting standards are ASC 810 and IFRS 10. Consolidated entity reporting depends on who controls what. Generally, all entities subject to the reporting entity’s control must be consolidated, although there are limited exceptions for a reporting entity defined as an investment company.
Multi-companies that track consolidated financial data on spreadsheets often wait for data from their subsidiaries, adding to the delays inherent in manual accounting processes. With a consolidated accounting solution, organizations can consolidate financial statements, income statements, balance sheets and close the books quickly with improved accuracy while facilitating regulatory compliance.
Another benefit is controlling user access and preventing unauthorized users from accidentally or deliberately tampering with other entities’ data. Without proper monitoring, these separate entities can spend over their budget, make data entry errors or be subject to theft and fraud.