What Is Financial Consolidation in Accounting? A Complete Guide to the Process

Financial consolidation is one of the most complex, time-consuming tasks for finance teams.

Global companies managing consolidation across multiple geographies and various subsidiaries can have finance consolidation processes that take weeks to complete and produce inaccurate results. This leaves finance teams little time to engage in critical strategic, forward-focused activities.

But this needn’t be the reality for your company. In the digitized business landscape, consolidation in finance can be streamlined and simplified to drive profound benefits.

In this guide, we’ll cover everything you need to know about financial consolidation, including key steps, common challenges, and how to choose the best software.

Table of Contents

• What Is Financial Consolidation?
• What Is the Difference Between Individual and Consolidated Financial Statements?
• Why Is Consolidation in Finance Important?
• When Is Financial Consolidation and Close Performed?
• What Steps Are Involved in the Financial Consolidation Process?
• Financial Consolidation Example
• Common Challenges With Finance Consolidation
• Financial Consolidation Regulatory Requirements and Standards
• Consolidation in Finance: Mistakes to Avoid
• What Is the Future of Financial Consolidation?
• How to Choose the Right Financial Consolidation Software
• Try Out the Leading Solution For Complex Financial Consolidations
• FAQs About Financial Consolidation

What Is Financial Consolidation?

Financial consolidation is an accounting process in which financial transaction data from multiple entities, subdivisions, and subsidiaries is aggregated and merged into a single set of financial statements.

This provides comprehensive financial reports for specific reporting periods, including the essential pro forma statements required by Generally Accepted Accounting Principles (GAAP).

The practice of financial consolidation encompasses complex calculations and consolidation adjustments, including intercompany reconciliation, transaction elimination, and foreign currency conversion.

By consolidating disparate financial data into a centralized repository, parent companies enhance visibility into their investments, profit, expenses, and overall financial health.

They gain access to unified, consistent data for specific periods, accelerating the time it takes to close books, realize critical insights, and make pivotal financial decisions.

What Is the Difference Between Individual and Consolidated Financial Statements?

Individual and consolidated financial statements report on business entities' financial health using documents like balance sheets, income statements, and cash flow statements.

However, there are a couple of key differences that we’ve compiled into the table below:

Why Is Consolidation in Finance Important?

Financial consolidation is a critical step in a parent company’s monthly closing and financial reporting process despite its complexity.

When you successfully meet consolidation finance objectives, you gain a holistic view of your company’s financial health, enhance strategic decision-making, and improve transparency.

Let’s take a look at these benefits in more depth.

1. Provides a Holistic View of the Company's Financial Health
   By centralizing and merging disparate financial data, companies gain a holistic overview of their financial health and a focused insight into subsidiaries' financial needs and health.
   Financial consolidation eliminates blind spots in financial visibility. Finance planning and analysis (FP&A) teams can continuously track and monitor financial performance, identify and mitigate risks, and present stakeholders with a reliable understanding of your company’s financial position.
2. Enhances Decision-Making and Strategic Planning
   Effective decision-making and planning rely on top-level insight into the combined financial performance of subsidiaries, along with specific financial contributions, needs, and limitations.
   Financial consolidation delivers these insights, empowering FP&A teams to optimize budgets, create accurate forecasts, design strategic maps, set realistic goals, and formulate data-driven investment strategies.
3. Improves Transparency and Accountability for Stakeholders
   Internal and external stakeholders must have accurate, all-inclusive insight into your company’s financial health.
   Internal stakeholders can leverage the reports generated by financial consolidation to understand the impact of specific business decisions and activities, improving accountability.
   External stakeholders, like investors and auditors, gain the financial performance transparency needed to analyze your risk profile, instilling confidence in your financial stability.
4. Facilitates Regulatory Compliance and Reporting
   Depending on your jurisdiction and business structure, you may be legally required to conduct financial reporting in alignment with regulatory guidelines.
   Financial consolidation ensures that you adhere to the accuracy, reliability, and transparency standards laid out by accounting frameworks and regulatory bodies.
   This includes the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS).

When Is Financial Consolidation and Close Performed?

Financial consolidation and closing align with your business’s accounting period—usually on a monthly, quarterly, or annual basis.

Consolidation must be completed on time to meet compliance requirements and ensure that reports are reliable, accurate, and useful.

For this reason, financial consolidation and close activities normally begin at the beginning of the accounting period and are ongoing throughout.

What Steps Are Involved in the Financial Consolidation Process?

The financial consolidation process consists of six key steps:

1. Data collection
2. Conversion
3. Intercompany reconciliation
4. Adjustments
5. Eliminations
6. Reporting

1. Conversion - Once your parent company has collected the financial statements, it needs to convert the data into a master currency. For example, a parent company in the U.S. would need to convert the ledger data it collects from a U.K.-based subsidiary from pounds into dollars, assuming these are the reporting currencies being used.
   For accurate and effective currency translations, look up the foreign exchange rate for the currency during the period you're analyzing.
2. Intercompany Reconciliation - If your parent company sells a product to a subsidiary—or vice versa—it’s called an intercompany transaction. Intercompany transactions can also occur between two subsidiaries.
   You need to perform intercompany reconciliation to avoid discrepancies in your consolidation statement. This involves going through your transactions to verify their status as an intercompany exchange.
3. Adjustments - At this stage, accountants adjust journal entries to account for overlooked mistakes and last-minute changes, such as exchange-rate fluctuations or double entries.
4. Eliminations - Some types of data will need to be eliminated from your consolidated financial statement, the most important of which are intercompany transactions and loans.
   Because intercompany transactions and loans generally don’t count as profit, losses, or equity, they’re eliminated to ensure that only third-party transactions are represented in consolidated statements.
5. Reporting - Finally, finance departments can finalize their balance, income, and cash flow statements, close their books, and report to internal and external stakeholders in adherence to regulations.

Financial Consolidation Example

To help you understand how financial consolidation works, here’s a real-world example of consolidation in action.

PepsiCo is a multinational company with an impressive number of subsidiaries within and outside of the soda industry—Doritos, Quaker Oats, and Gatorade, to name a few.

To comply with GAAP as a publicly traded company, PepsiCo must collect financial statements from all of its subsidiaries and consolidate them into a report.

This entails converting a range of currencies (PepsiCo sells products in over 200 countries), as well as reconciling and eliminating vast intercompany transactions and making adjustments.

When reports are completed, they’re used by shareholders to establish overall financial health and performance, along with potential risks and areas for strategic improvement.

Common Challenges With Finance Consolidation

Financial consolidation is prone to several challenges that, if not considered, can harm your process and reports.

• Handling complex organizational structures: Companies with complex structures—such as many globally distributed units or newly integrated entities—can encounter significant obstacles.
  Lack of communication, poorly synchronized financial processes, and evolving regulation requirements globally can inhibit effective financial consolidation.
• Managing different accounting standards and regulations: Country-specific variations in accounting standards and regulations complicate consolidation for companies working across multiple geographies.
  Parent companies must amend each incoming statement according to their own standards to ensure uniformity and compliance in the consolidated report.
• Ensuring data accuracy and consistency: Companies with multiple disparate sources governed by manual data entry and validation processes can lead to inaccurate, unreliable data.
  Coupled with inconsistencies in standardization, this can erode the value of financial insights, which can have severe, negative repercussions.
• Overcoming time constraints during reporting periods: Financial consolidation tasks are complex and time-consuming. Meeting tight financial reporting deadlines can be a struggle for entities that rely on inefficient manual processes and disconnected systems.

Financial Consolidation Regulatory Requirements and Standards

Failing to comply with regulatory requirements harms the value of your financial insights and can have severe legal, financial, and reputational repercussions.

This is why it’s so important to understand the accounting rules and principles laid out by frameworks like GAAP and IFRS.

In this section, we’ll explore how to remain compliant when conducting financial consolidation.

• Complying with GAAP: Created by the Financial Accounting Standards Board (FASB), GAAP is a rules-based accounting standard. It dictates specific actions and precautions that public U.S. companies should take when preparing financial statements to ensure accuracy, completeness, transparency, and comparability.
• Complying with IFRS: Developed by the International Accounting Standards Board (IASB), the IFRS framework is a principles-based standard governing how financial statements should be maintained and reported internationally.
  This standardizes financial reporting for businesses with overseas subsidiaries and/or overseas stakeholders, focusing on transparency and consistency.
• Complying with regulatory bodies: On a broader level, you need to comply with regulatory requirements for financial reporting. This includes those imposed by FASB and IASB, along with other region or industry-specific regulatory bodies, such as the Securities and Exchange Commission (SEC) and the Federal Reserve Board (FRB).
• Using qualified external auditors: Auditors conduct in-depth reviews of your financial statements to ensure that financial reports are complete and free of material misstatement.
  External auditors deliver more unbiased and honest opinions than internal auditors, enhancing compliance and legitimizing financial health to investors and lenders.
• Leveraging technologies to boost compliance: Financial reporting tools automate complex financial consolidation processes, enhancing accuracy and making it easier to meet compliance requirements.
• Providing ongoing employee training: Regularly train your finance and accounting teams on the rules stipulated by relevant regulatory bodies and accounting standards, including the latest updates and best practices.

Consolidation in Finance: Mistakes to Avoid

Along with the challenges we discussed earlier, businesses make some common mistakes when conducting financial forecasting that can erode the value of reports. Here are some mistakes to avoid:

1. Inaccurate elimination of intercompany transactions
   There are three types of intercompany transactions: lateral, upstream, and downstream. All types describe transactions between entities within the same company (such as between two subsidiaries or between the parent company and the subsidiary).
   Failing to accurately eliminate these transactions results in the inflation or deflation of results, meaning you don’t have an accurate picture of your financial health.
   To avoid this issue, you need a clear, detailed (preferably automated) process to ensure that all intercompany transactions are recorded, adjusted, and eliminated.
2. Overlooking currency conversion adjustments
   Multinational companies must consider foreign currency translation—i.e., converting currencies in alignment with exchange rates. If exchange rates and currency fluctuations are miscalculated or unaccounted for, it ruins the accuracy of your financial health profile.
   Implementing automated currency conversions can drive consistency and eliminate human error and oversight.
3. Failing to standardize accounting practices across subsidiaries
   If one subsidiary uses specific accounting practices for reporting and another follows a different strategy, it will accumulate inconsistent data difficult to analyze. The more entities you have, the more complex it becomes.
   By standardizing accounting practices across subsidiaries, you ease and improve data accuracy and analysis. Develop consistent standards and processes for collecting, formatting, naming, and categorizing data.

What Is the Future of Financial Consolidation?

Financial consolidation is poised for profound transformation in the face of rapid technological advancement.

Robotic Process Automation (RPA) continues to expand its capabilities to automate increasingly complex manual processes, enhancing efficiency and productivity at scale.

For finance teams leveraging RPA, the future looks set to involve fewer meticulous, labor-intensive tasks, empowering them to focus on strategic, analytical activities.

Speaking of analytical activities, access to real-time data grows more vital as businesses fight to remain competitive in oversaturated markets. Companies that adopt software won’t feel the restrictions of waiting until the end of the month for insights.

Instead, they can access real-time consolidation data, leading to continuous performance insights, time-sensitive analysis, and better decision-making.

Also on the horizon are increasingly intelligent AI predictive analytics, capable of detecting intricate anomalies, patterns, and correlations in financial data. This empowers hyper-accurate forecasting, resulting in optimized financial strategies and heightened competitiveness.

Multinational companies, in particular, will need to adopt innovative technological solutions to meet the complex needs of the global economy.

Navigating increasingly strict accounting standards and tax regulations across countries, along with volatile exchange rates and currencies, will require financial consolidation software investment to streamline the process, reduce risks, and fuel business sustainability.

How to Choose the Right Software For Consolidating Financials

Effective, accurate, and timely financial consolidation relies on powerful, feature-rich software that’s secure, agile, and built with advanced automations and native integrations.

To help you evaluate solutions, we’ve compiled a list of the key things to look out for in your search for the best financial consolidation software.

Automation

The most effective financial consolidation software should automate consolidation tasks that are time-consuming, tedious, and prone to error. This includes everything from data entry, data verification, and currency conversion to report generation and intercompany transaction elimination.

Identify the areas that take up most of your team’s time or are prone to the most errors. Use this understanding to establish automation priorities and implement a solution that drives efficiency and accuracy to the areas you need them most.

Features

Aside from the consolidation functionalities and automations you’d expect, look for features that add extra value to your financial operations. The best financial consolidation software has rich features to support financial planning, people management, capital planning, and more.

Onestream’s platform, for example, is embedded with advanced features like AI-powered financial forecasting and predictive analytics.

Integrations

Look for a solution that offers seamless integration with the software solutions your parent company and subsidiaries already use to enable tight data syncing, streamline your consolidation process, and maximize productivity.

Prioritize integrations with your existing ERP systems, performance management system, and ERM.

Speed and Agility

Not only should the software you choose support rapid deployment to accelerate time-to-value, but it should also accelerate your entire consolidation process. Check that your software delivers real-time consolidated reporting to reduce late reporting and empower leadership to make data-backed, time-sensitive decisions.

Security and Compliance

Opt for software built to comply with accounting standards like GAAP and IFRS. It should include sophisticated security features to reduce your risk of data breaches and cyber threats, such as multi-factor authentication, access controls, SSL, and encryption.

Try Out the Leading Solution For Complex Financial Consolidations

The manual complexity of financial consolidation limits accurate financial performance insights and hinders strategic, forward-thinking initiatives. This is why small, mid-size, enterprise, and multinational companies alike are turning toward cloud-based technologies.

OneStream is a leading financial consolidation solution because it can accelerate the period-end close process while maximizing data accuracy, ensuring compliance, and delivering real-time insights.

From auto-delivered currency translations and auto-matched transactions to automated data loading, reconciliation, and reporting, OneStream’s AI-powered software empowers end-to-end automation.

Equipped with user-friendly features like drill-to-reconciliation, collaboration tools, and powerful integrations with platforms like Oracle, SAP, and Hyperion, you empower finance teams to achieve their goals.

Did you know OneStream also offers a weekly live demo webinar every Friday for 1 hour on a specific topic? We also have a comprehensive resource library that you can explore to discover the latest trends, innovations, and how-to’s in all things finance.

To unlock speed, accuracy, and strategic value to your financial consolidations, request a demo and get started with OneStream’s unified solution.

FAQs About Financial Consolidation

What Is the Purpose of Financial Consolidation?

Financial consolidation aims to aggregate the financial data of multi-entity companies into one unified report to gain a comprehensive overview of the parent company’s financial health.

What Is the Impact of Financial Consolidation in Accounting?

Financial consolidation has a significant impact on accounting. By regularly consolidating financial statements across multiple subsidiaries, companies glean a holistic view of financial performance that can be used to enhance shareholder decision-making and instill stakeholder confidence.

That said, if the process is completed manually, it can be a detriment to accounting as it’s lengthy, productivity-draining, and prone to error.

How Are Companies Tackling Financial Consolidation Today?

Modern companies are turning to advanced technologies to automate and streamline financial consolidation. Unified financial consolidation software and tools can leverage AI and automation to speed up the timeline, reduce errors, and gain access to real-time insights.

What Is the Difference Between Financial Consolidation and Consolidation Financing?

Consolidation financing—often called debt consolidation—is the process of combining multiple debts from different lenders into a single loan. Companies may do this to streamline their administrative process or reduce monthly repayment costs.

On the other hand, financial consolidation is when a parent company combines financial statements from different subsidiaries into a single report.

What Is the Difference Between Consolidation in Finance and Consolidation in Business?

Consolidation in business refers to when a larger business merges with or acquires a smaller company, creating a larger, single business unit. This is in contrast to consolidation in finance, which is focused on collecting and aggregating financial statements across different subsidiaries.