A financial close and consolidation is a complex process involving many calculations and the elimination of intercompany transactions. Companies must follow different methods when consolidating their accounts and when their controlling stake is divided among multiple subsidiaries. It can feel like a mountain of spreadsheets, and the process is prone to errors. If you’re looking for a low-cost, effective solution to this process, spreadsheets are a great choice.
Accounting for intercompany transactions
Practical intercompany accounting relies on standard global policies, data and charts of accounts, and allocation methods. You can address these factors through a company-wide process, ensuring best practices and visibility. In addition, by creating a single unified approach, companies can benchmark performance, simplify post-close review processes, and streamline activities. But how can organizations ensure that intercompany accounting practices are as effective as they need to be?
The first step in the process is to understand how intercompany transactions affect the financial statements of each entity. A cross-section of intercompany transactions is a typical example of such a scenario. For example, a parent’s investment in a subsidiary was previously accounted for as equity in the subsidiaries’ balance sheets. Its retained earnings were then allocated proportionally to non-controlling and controlling interests. This is not a simple process, and accounting for it requires extensive knowledge and a thorough understanding of how intercompany transactions impact the financial statements of each entity.
Methods of preparing consolidated financial statements
When one company controls another, you must prepare a consolidated financial statement. Control is typically assumed when a company owns more than 50 percent of a subsidiary’s stock. This financial report must explain the subsidiary’s revenues and expenses and the assets and liabilities. In addition, various consolidated totals must be computed, including return on assets and total asset turnover. Generally, it would be best if you prepared these consolidated financial statements for each parent company and its subsidiaries.
A consolidated financial statement aims to give an accurate picture of an organization’s financial condition and operating results. The right way to prepare it is using legal entity-based financial statements by GAAP. The final document should visualize financial info without confusing interested parties. It is also essential to follow the procedures and policies consistently and not change without sufficient reason. For example, a consolidated balance sheet should include cross-sales.
Benefits
A financial close and consolidation process helps companies deliver the information they need to make business decisions faster and more accurately. Companies that automate the financial close can drill down to the granular level of detail and report more accurately. This will enable management to identify any problem areas quickly. Ultimately, it will also improve the quality of decision-making for businesses. The benefits of automating financial close and consolidation processes are many.
One of the significant benefits of automation tools for close and consolidation is that they help finance teams focus on other essential tasks. Many devices can perform these tasks, but the best approach is to separate them. This will allow you to explore more advanced planning capabilities. An example of such a tool is insight software. It has been assisting finance teams for more than two decades. With automated financial close and consolidation processes, your finance team can focus on analysis and other critical aspects of the business.
Process of performing a financial close and consolidation
Performing a financial close and consolidation can become a lengthy and complex affair. You must complete the sequential steps involved in the process efficiently and adequately. Accounting teams must close their books at the end of each fiscal period. By performing the process a few days early, they can push transactions to the next reporting period. This allows them to prepare estimates for the remaining days of the month and reconcile them with actuals.
The financial close and consolidation process requires accounting teams to review all transactions and relevant data. These teams prepare information based on specific standards, including IFRS and personal reporting requirements. Financial statements included in the process have the income statement, balance sheet, and statement of cash flows. Once the consolidation process is complete, the organization is ready to submit its financial statements. The method of performing a financial close and consolidation is essential for companies with several levels of the organization. To find more information, you can also visit https://onestreamsoftware.com/solutions/financial-close-and-consolidation/.
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