Financial Reporting and Consolidation: Designing Financial Reports - Part 8

12.5  ALTERNATIVE APPROACHES FOR CONSOLIDATED FINANCIAL REPORTING

Within the set of features and capabilities available in a modern general ledger system, three basic approaches may be used for combining or consolidating financial information:

• Replacement consolidation.
• Consolidation using financial reporting capabilities.
• Consolidation on a spreadsheet.

These approaches use different techniques to map account information from different subsidiary ledgers into a single line of combined or consolidated information.  The manner in which this mapping occurs is a key difference between each of these approaches.  These approaches are used for reporting either consolidations or combinations.

REPLACEMENT CONSOLIDATION

A popular and straightforward approach for financial consolidation involves the use of a consolidated accounting company to receive and store consolidated account balances from other subsidiary accounting companies.  Overall, this approach of replacement consolidation offers the distinct advantage of allowing consolidated account balances to be retained on the general ledger master file.  This provides a host of benefits, including

• The use of financial reporting structures and other financial reporting capabilities associated with general ledger master file accounts.
• The use of journal entry templates for creating elimination and other closing journal entries in the consolidating accounting company.
• A period-to-period record of consolidated account balances available for inquiry and reporting.

Basic Approach.  Under the concept of replacement consolidation, empty account balances in this consolidated accounting company are replaced by cumulative balances from the those of subsidiary accounting companies, as shown here. 
 

Indeed, different systems have different implementations of this approach.  For example, some general ledger systems implement replacement consolidation by storing the parent company's account number in each of the subsidiary account's record on the general ledger master file.  Thus, using the previous example, the Company 10 account, 1100 Cash, will retain information indicating that it consolidates into the account Company 99, 1100 Cash, in the parent company.

Another approach involves an external specification that lists the accounts (and respective accounting companies) mapping into each consolidated account.  Again using the previous example, the system would store tabular information associating the five subsidiary accounts with the 1100 Cash consolidated account.  This tabular approach provides a straightforward audit trail of the consolidation process, although any system using the first approach should do this as well.  Generally, no significant advantages or disadvantages distinguish one approach over the other.

With replacement consolidation, the system must enforce a restriction on those account balances in the consolidated accounting company that are updated via replacement.  Like summary accounts in the chart of accounts, the balances of these accounts may be updated, that is, replaced, only through the defined account mapping.  They cannot be updated by using journal entries.  This is necessary to accommodate multiple replacement runs, should the accounting department decide to rerun the replacement consolidation process a second time.

Except for this difference, the consolidating company has all the features and attributes of any other general ledger accounting company.  In fact, it may contain other posting accounts that can be updated via journal entry, such as for overhead expenses, retained earnings, and corporate debt.  These are accounts that would typically not exist in any other business unit's accounting ledger. (If isolating these corporate accounts is desirable, an alternative is to set up a separate accounting company to hold them.)

A Refinement Using Identical Accounts.  Note that the mapping shown in the previous example allows dissimilar account numbers to be mapped into a particular account in the consolidated accounting company.  Some general ledger systems forego this flexibility for a much simpler approach to tie subsidiary and parent accounts together.  This refinement requires maintaining consistent account numbers among the different accounting companies and allows the consolidation to flow from accounts in one company, to identical account numbers in another company.  A key advantage to this approach is that the mapping of accounts can be defined on a company rather than an account level.  This avoids the need to specify a mapping or relationship between individual accounts and, instead, allows this relationship to exist on an accounting company level.

There is one slight disadvantage to this approach; it may require creating detailed accounts in the consolidated accounting company that would not otherwise be necessary.  To illustrate this using the previous example, the consolidated accounting company (Company 99) would require an account set up to receive the balances from the accounts, 1110 CDs, even though there is no reporting requirement for this information within Company 99:

NEXT MONTH'S TOPIC: INTERCOMPANY ELIMINATIONS WITH REPLACEMENT CONSOLIDATION