What is financial consolidation?

‍

Financial consolidation is the process of combining the individual financial statements of multiple legal entities within a corporate group into a single set of consolidated financial statements that represent the group as a whole.

‍

Consolidation involves more than adding up the numbers from each entity. It requires eliminating transactions between group entities, translating foreign currency balances, applying consistent accounting policies across entities, and handling minority interests.

‍

Why financial consolidation matters

‍

Investors, lenders, boards, and regulators need to understand the financial position of a business as a whole. Consolidated financial statements provide that view by stripping out intragroup activity and presenting the group's external financial position.

‍

How financial consolidation works

‍

Step 1 — Collect entity financials. Each subsidiary or entity submits its trial balance or financial statements for the period.

‍

Step 2 — Translate foreign currencies. Entities reporting in currencies other than the group reporting currency have their balances translated using appropriate exchange rates.

‍

Step 3 — Apply consistent accounting policies. Adjustments are made where subsidiary accounting policies differ from the group's.

‍

Step 4 — Eliminate intercompany transactions. Sales, purchases, loans, dividends, and balances between group entities are eliminated.

‍

Step 5 — Aggregate and produce group statements. Adjusted entity financials are aggregated into group income statement, balance sheet, and cash flow statement.

‍

What makes consolidation hard

‍

Consolidation complexity grows with the number of entities, the number of currencies, the depth of intercompany relationships, and the degree of policy divergence across subsidiaries. Manual consolidation in spreadsheets is one of the most error-prone finance activities that exists.

‍

Related: Intercompany reconciliation · Financial close · Record-to-Report (R2R) · Multi-currency reconciliation