Consolidation Accounting: A Comprehensive Guide for Accountants

For organizations with a parent company and multiple subsidiaries, developing financial statements can be complicated. There are many factors involved in calculating total income, assets, and liabilities for an entire business group.

Despite this complexity, having a clear picture of a group’s financial health is crucial for budgeting decisions. That’s why error-free consolidation is one of the most important goals at the end of an accounting period. In this article, we explore what consolidation in accounting is, why it matters, and how to complete it correctly.

Key Takeaways

• Consolidation accounting means combining data from subsidiary and parent companies to create unified financial statements.
• Accountants can overcome obstacles to effective consolidation with thoughtful preparation and strategic technology investments.
• Several best practices enable faster, more organized consolidation, including consistent processes, cloud-based platforms, and automatic notifications.

What is consolidation in accounting​?

Consolidation in accounting is combining data from subsidiary and parent companies to create unified financial statements.

Why is consolidation accounting important?

Consolidation lets companies develop smarter business strategies because it offers a comprehensive, holistic view of transactions, liabilities, and assets across all entities. It also identifies taxable income with more precision to support compliance with tax regulations.

The Generally Accepted Accounting Principles (GAAP) mandates consolidation when a company owns a controlling interest in subsidiaries. Adhering to GAAP is required for publicly traded U.S. companies per the Securities and Exchange Commission (SEC). Since subsidiaries can significantly impact an organization’s performance and cash flow, it’s important to take these businesses into account for a fully accurate budget analysis.

What are consolidated financial statements?

Consolidated statements are documents that combine financial details from business groups and subsidiaries. These can be used to help accountants evaluate an entire business group’s financial well-being.

The importance of consolidated financial statements stems from their ability to help improve decision-making, provide tax advantages, and maintain compliance.

What are the three types of consolidation accounting?

There are three ways to consolidate financial statements, depending on how much of a subsidiary a company owns and its influence on operations:

1. Full consolidation: Records all of a subsidiary’s income, assets, and liabilities on its parent company’s financial statements. This method is used when a business owns more than 50% of another business and has full control over operations.
2. Equity consolidation: Accounts for the parent’s share of profits and losses when it has significant influence over a subsidiary, but no controlling interest. Using this method, a company only consolidates financial data that reflects changes in the value of its shares. For example, if Company X invests $500,000 in 15,000 shares of Company Y, and those shares are worth $700,000 at the end of the accounting period, consolidation will be based on the $200,000 difference.
3. Proportionate consolidation: Occurs with a non-controlling interest when the percentage of a company owned by a business group is the same percentage used for consolidating financials. For instance, if Company A owned 52% of Company B, it would record a 52% investment of Company B’s assets, liabilities, revenues, and expenses in its own financial statements. Since 2013, this method has rarely been used. The International Financial Reporting Standards (IFRS) abolished proportionate consolidation to get rid of inconsistencies in joint venture reporting.

How to consolidate in accounting

A consistent and organized consolidation process is essential for creating reliable financial statements. While each company has its own workflows, here are a few steps business groups generally follow:

1. Identify subsidiaries: Determine which entities should be consolidated based on the parent-subsidiary relationship.
2. Collect financial documents: Develop individual financial statements for each entity, including income statements, balance sheets, and cash flow statements.
3. Account for inter-company transactions: Avoid double-counting revenues or expenses, striking any sales, loans, and dividends that pass between parents and subsidiaries from the records.
4. Recognize minority interest: Calculate the portion of a subsidiary’s value that can be attributed to non-controlling interests, if applicable.
5. Develop consolidated statements: Combine financial information from all entities to generate comprehensive aggregated statements.

Related read: Transform workflows with ShareFile™ for accounting features

Addressing key consolidation challenges

Many obstacles get in the way of consolidation efforts, but accountants can overcome these with thoughtful preparation. Here are a few challenges to proactively address:

• Complex calculations: The need to account for inter-company transactions, partial ownership, and foreign subsidiaries with different currencies can make consolidation extremely complicated. Businesses may need to hire specialists or invest in technology to support current staff. Be sure to plan far in advance of consolidation deadlines so employees have enough time and resources to make the correct calculations.
• Manual processes: Relying on spreadsheets and manual data entry to combine statements is time-consuming and leads to errors. For faster and more accurate reporting, automate as many tasks as possible throughout the consolidation process. Aside from boosting efficiency, automating routine activities gives accountants more time to deal with unexpected issues that require human intervention.
• Inaccurate data: Poor-quality data can create inaccuracies that are difficult to detect and fix. This problem often results from mistakes that happen when staff manually record transactions or merge information from multiple sources. Address the issue by automating the logging and transfer of financial data.
• Regulatory updates: Requirements for accounting reports are always changing, so it can be hard to stay on top of regulations as business groups expand and consolidation becomes more complex. Gain peace of mind by using an accounting solution with built-in compliance and regular updates to keep up with the latest legal standards.
• Outdated software: Legacy accounting systems that don’t integrate with other applications create fragmented processes and cause delays. Using this technology can also lead to security and compliance concerns by not meeting modern-day legal standards. Upgrade to newer solutions so that data is protected and flows seamlessly between parent and subsidiary organizations without compromising compliance.

Best practices for consolidation in accounting

After addressing key challenges for combining financial statements, there are several accounting and consolidation best practices to keep in mind for a faster, more reliable process.

Implement consistent workflows

Avoid errors and delays by standardizing consolidation across business entities. When every organization is aligned on steps for collecting and aggregating data, groups are more likely to produce timely, accurate reports. This is why the Financial Accounting Standards Board (FASB) emphasizes the need for consistent accounting principles.

We touched on automation above as a way to reduce errors and boost efficiency — it also promotes standardization. Automate tasks for recording and sorting information to ensure each subsidiary is following the same steps, achieving consistently high levels of speed and accuracy.

Identify and address bottlenecks

Evaluate workflows to see if any practices are causing delays. As businesses scale, processes evolve, and bottlenecks may arise when new tasks and systems are introduced. Regularly review procedures to check for this issue. Once the root cause is discovered, make a plan to address it, such as employing automation to speed up repetitive tasks or enabling notifications to move operations along.

Use cloud-based platforms

Cloud storage is ideal for consolidation because it offers increased security, flexibility, and scalability. It keeps data protected with access controls and multi-factor authentication while allowing remote teams to retrieve information from anywhere. Cloud-based platforms can also grow with companies as they gain more subsidiaries, providing storage on a pay-as-you-go basis and creating space for financial documents as needed.

Related read: Great security doesn't have to get in the way of a great user experience

Conclusion: Leverage the right tools to consolidate accounts quickly and accurately

While consolidation accounting can be a significant undertaking, effective processes and solutions make it more manageable. By systematically addressing challenges and following best practices, companies can perform correct financial calculations and gain reliable insights for smarter business decisions.

To start optimizing consolidation practices, look into accounting solutions that promote secure, efficient, organized workflows.