Consolidation accounting
/How to Account for a Consolidation
Consolidation accounting is the process of combining the financial results of several subsidiary companies into the combined financial results of the parent company. This method is typically used when a parent entity owns more than 50% of the shares of another entity. The following steps document the consolidation accounting process flow.
Step 1. Record Intercompany Loans
If the parent company has been consolidating the cash balances of its subsidiaries into an investment account, record intercompany loans from the subsidiaries to the parent company. Also record an interest income allocation for the interest earned on consolidated investments from the parent company down to the subsidiaries.
Step 2. Charge Corporate Overhead
If the parent company allocates its overhead costs to subsidiaries, calculate the amount of the allocation and charge it to the various subsidiaries.
Step 3. Charge Payables
If the parent company runs a consolidated payables operation, verify that all accounts payable recorded during the period have been appropriately charged to the various subsidiaries.
Step 4. Charge Payroll Expenses
If the parent company has been using a common paymaster system to pay all employees throughout the company, ensure that the proper allocation of payroll expenses has been made to all subsidiaries.
Step 5. Complete Adjusting Entries
At the subsidiary and corporate levels, record any adjusting entries needed to properly record revenue and expense transactions in the correct period.
Step 6. Investigate Asset, Liability, and Equity Account Balances
Verify that the contents of all asset, liability, and equity accounts for both the subsidiaries and the corporate parent are correct, and adjust as necessary.
Step 7. Review Subsidiary Financial Statements
Print and review the financial statements for each subsidiary, and investigate any items that appear to be unusual or incorrect. Make adjustments as necessary. This task is completed at the subsidiary level.
Step 8. Eliminate Intercompany Transactions
If there have been any intercompany transactions, reverse them at the parent company level to eliminate their effects from the consolidated financial statements.
Step 9. Review Parent Financial Statements
Print and review the financial statements for the parent company, and investigate any items that appear to be unusual or incorrect. Make adjustments as necessary.
Step 10. Record Income Tax Liability
If the company earned a profit, record an income tax liability. It may be necessary to do so at the subsidiary level, as well. This will likely require the input of tax specialists, which can delay the closing process.
Step 11. Close Subsidiary Books
Depending upon the accounting software in use, it may be necessary to access the financial records of each subsidiary and flag them as closed. This prevents any additional transactions from being recorded in the accounting period being closed.
Step 12. Close Parent Company Books
Flag the parent company accounting period as closed, so that no additional transactions can be reported in the accounting period being closed. Where this flag is located will depend on the structure of the accounting software being used.
Step 13. Issue Financial Statements
Print and distribute the financial statements of the parent company. This will likely include distributions to investors, creditors, and lenders, and perhaps to any government entities involved in the oversight of the business.
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Business Combinations and Consolidations
If a subsidiary uses a different currency as its operating currency, an additional consolidation accounting step is to convert its financial statements into the operating currency of the parent company.
The Consolidation Procedure
Given the considerable number of steps, it is useful to convert them into a detailed procedure, which the accounting department should follow religiously as part of its closing process. Otherwise, a key step could be missed, which would throw off the financial statement results. This is especially important when there there are few automated consolidation steps, which is most likely when each entity involved in the process is using a separate accounting software system.
Some of the tasks noted here can be automated, or at least made simpler, in order to produce financial statements more quickly. However, to some degree, the higher level of precision required to produce more accurate financial statements requires additional consolidation effort, and therefore more time. These extra steps should be allotted extra time in the closing schedule, so that the controller is fully aware of the extra time required to complete the consolidated financial statements. This extra time allowance is also needed to schedule a somewhat delayed start to the annual audit, so that the financial statements are ready for audit review.