In our first article, we looked at when consolidation becomes a topic.
Once that is established, the next question is straightforward: what does it actually involve in practice for a group?
Consolidation is not simply about adding together financial statements. Its purpose is to present several companies as a single economic entity. In practice, this means first defining the right perimeter, then collecting and harmonising financial information, before eliminating internal transactions within the group.
Consolidation in practice: 5 key steps
- Define the consolidation perimeter
Identify which entities must be included and from when. - Collect the financial information
Gather the accounts and relevant data from each entity. - Harmonise the financial information
Align accounting policies, reporting dates and, where relevant, currency. - Eliminate intragroup transactions
Remove internal balances and transactions within the group. - Produce a consistent group view
Present the group as a single economic whole.
Define the consolidation perimeter
The process starts with a simple question: which entities should be included in consolidation?
In practice, an entity is included in consolidation from the moment the group obtains control over it. Conversely, it leaves the perimeter when that control ceases. This is particularly important when there is a change in perimeter during the year. The date on which control begins or ceases has a direct impact on the consolidation treatment.
Not all entities linked to the group will necessarily be consolidated in the same way, depending on the form of control exercised by the group over them.
Collect the financial information
Consolidation relies on the accounts and financial information provided by the different entities within the group.
This requires reliable data, available in a timely manner and presented in a format that can be used effectively. In more structured groups, this reporting process may rely on a consolidation package, group instructions or a consolidation manual.
Consolidation does not replace the quality of the local accounting records. It depends on them.
Harmonise the financial information
Once the data has been collected, it must be made comparable and capable of being aggregated at group level.
This means aligning the accounting treatments applied by the different entities with the accounting policies adopted by the group. In practice, material differences between local treatments and group rules must be adjusted so that the same transaction is treated consistently across the group.
The reporting date for the consolidated financial statements will often coincide with the year-end of the parent company. It is therefore important to ensure that the information produced by the group entities is aligned with that date. If not, interim financial information at the group reporting date may be required.
Finally, in order to be aggregated, the financial statements of all entities included in consolidation must be expressed in the group’s presentation currency. If some entities report in a different currency, their financial information may need to be translated before being included in consolidation.
Eliminate intragroup transactions
This is often the most intuitive part of the process when explaining the logic of consolidation.
If one group company sells to another group company, that transaction exists in the separate financial statements, but it does not create value at group level. The same applies to an intercompany receivable in one entity and the corresponding payable in another: from the group’s perspective, the two amounts offset each other.
Consolidation therefore requires internal group transactions to be eliminated so that only the group’s relationship with the outside world remains visible. This includes in particular:
- intragroup receivables and payables;
- internal sales and purchases;
- and, more broadly, any other internal transaction or effect that must be eliminated in order to present a true and fair view of the group.
Produce a consistent group view
Once the perimeter has been defined, the data collected, harmonised and cleared of internal flows, the group can be presented as a coherent whole.
That is the core purpose of consolidation: moving from a company-by-company view to a group-level view.
Put differently, consolidation aims to provide an overall view of the group’s activity and financial position, as if it were a single economic entity.
Conclusion
Consolidation requires a clear organisation, a defined methodology and good-quality data.
In practice, the process can quickly become technical, especially when consolidation is being implemented for the first time.
In such cases, support from a specialist can help secure the process.