Financial Consolidations for Multi-Companies

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Why Financial Consolidation for Multi-Companies? 

Multi-companies are also known as multi-entities, which include a parent company, holding company, or conglomerate with various subsidiaries and divisions such as marketing, sales or human resources departments. Whether you are a small, medium or large organization, multi-companies need to consolidate their financials for a period end, in order to close their accounting records.

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. 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 consolidated balance sheet and consolidated income statements of the parent company.

When to Consolidate Financials

Accounting report regulations require the consolidation of the financial statements of the parent and subsidiary companies into one set of financial statements for the entire group of companies, regardless 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

Consolidated Statement of Income 

The consolidated financial statements only report income and expense activity from outside of the economic entity. Any revenue earned by the parent company that is an 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 from between related legal entities is offset by the expenses from the related other legal entity. To avoid overinflating revenues and expenses, all inter-company revenues and expenses are omitted.

Consolidated Balance Sheet

Likewise, inter-company account receivable balances and account payable balances are eliminated from the consolidated balance sheet. This is to ensure the inter-company balances are reported as net $0. All outside cash, receivables, and other assets and liabilities are reported on the consolidated statements.

Consolidated Financial Reporting Regulations

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, in order 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:

  1. The basic accounting principles and guidelines
  2. The detailed rules and standards by Financial Accounting Standards Board (FASB) and its predecessor the Accounting Principles Board (APB)
  3. The generally accepted accounting principles (GAAP)

There are also additional financial regulations under the FASB Accounting Standards Codification (ASC). These are a major shift in the organization and presentation of U.S. GAAP and is a major restructuring of accounting and reporting standards:

  • ASC 810 with IFRS 10
  • ASC 323 for equity method and joint ventures and IFRS 11 – joint arrangements

ASC 810 contains the main guidance for consolidation of financial statements, including variable interest entities (VIEs), under U.S. GAAP. IFRS 10 for consolidated financial statements contain IFRS guidance.

Under both U.S. GAAP and IFRS, consolidated entity reporting depends on who controls what. Generally, all entities subject to the control of the reporting entity must be consolidated, although there are limited exceptions for a reporting entity defined as an investment company.

An equity investment that gives an investor significant influence over an investee, referred to as an associate in IFRS is considered an equity method investment under both U.S. GAAP (ASC 323, Investments — Equity Method and Joint Ventures) and IFRS (IAS 28, Investments in Associates and Joint Ventures).

Furthermore, the equity method of accounting for such investments is consistent under U.S. GAAP and IFRS. The characteristics of a joint venture in U.S. GAAP (ASC 323) and IFRS (IFRS 11, Joint Arrangements) are similar, but certain differences exist. Both U.S. GAAP and IFRS also require investors to apply the equity method when accounting for their interests in joint ventures.

Consolidated Accounting Solution for Multi-Companies 

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 in a more timely fashion with improved accuracy while facilitating regulatory compliance for GAAP, IFRS and ASC.

Another benefit is controlling user access and preventing unauthorized users from accidentally or deliberately tampering with the data of other entities. Without proper monitoring, these separate entities can spend over their budget, make data entry errors or be subject to theft and fraud.

Financial reporting for multi-companies requires maintaining books, paying employees, managing accounts receivable and payable, and paying taxes in the currency of the region in which it is located for each division or subsidiary. However, all charts of accounts must be consolidated to the functional currency of the parent company.

Multi-Entity Company Software Automation

Multi-company software automation can speed up accounting processes such as financial consolidation and help ensure data accuracy as well as consistency across all databases, while facilitating regulatory compliance for GAAP, IFRS and ASC.

Multi-company software also solves the problem of consolidated financial statements by providing a separate view of the financial position of parent company and its subsidiaries for the CFO or Financial Director at the head office.

Binary Stream's Multi-Entity Management (MEM)

Binary Stream’s Multi-Entity Management (MEM) for Dynamics GP is a flagship product since 2004. The company is launching Multi-Entity Management (MEM) for Dynamics 365 Business Central to be aligned with Microsoft’s focus on Azure cloud solutions – coming soon this summer.

MEM for both platforms is a mid-market solution that helps multi-companies improve efficiency, save money, streamline processes, while maintaining data security and integrity. MEM allows multi-entities to extend their ERP with real-time consolidated financials, with user-access and reporting based on roles.

  • MEM Product Tour Video 2 shows how the intercompany transaction process is made easier. It also demonstrates how MEM can help reconcile inter-company transactions without manual effort.
  • MEM Product Tour Video 3 demonstrates how the database consolidation process is simpler, and how it improves the Report Writer system.

Watch the MEM Product Tour Videos