The Art of Statutory Consolidation - Part 1


04. 04. 18 TouchstoneBI

“Honesty is the first chapter in the book of wisdom” ~ Thomas Jefferson

There’s a bit of a mantra around here at TouchstoneBI; “It’s all about the data”. It’s true for BI projects, it’s definitely true for Data Warehousing projects, but it’s possibly truer than ever for a Statutory Consolidation Project.

Our deployment methodology for consolidation includes a separate discovery (or elaboration to give it its technical name) workshop that focuses on how, having done currency conversion and aggregation, the actual consolidation logic needs to function. It’s at this stage we ask the question of “how good is your data?” Why this stage? Well, consolidation requires the automatic elimination of a number of intra-group balances, such as intercompany trading accounts in the Income Statement. These should agree perfectly across the two businesses, allowing the group to report a set of accounts as a unified, single entity.

The answers always start with, “Our data’s fine, we have no problems.”

Let’s get past that:

“So you never have any intercompany differences? Never have to tweak the numbers in Excel?”

“Well we have some.”

Now we’re getting somewhere. Although this is quickly followed by:

“But the system can put any differences to a suspense code, can’t it?”

You might think that my answer would be along the lines of “thankfully, yes it can”. However, it’s normally more of a “yes, but…” After a number of years and different platforms, I long ago settled on the Infor d/EPM solution for consolidation. Its pre-built structure aids rapid deployment, but the nature of its modelling engine and reporting tool give it the flexibility to expand the model to cover new or specific requirements. Plus it handles differences in the eliminations with ease, with the ability to configure tolerances among other things. What this doesn’t address though, and what people forget, is that once the platform has journaled these differences to the relevant suspense code, they still have to go through and clear these suspense codes down. No audit is going to forgive a large suspense balance for intercompany eliminations. They have to be gone.

We normally find the worst component for these differences is in the Capital arena. Most Groups have a good understanding of what’s going on with the Income Statement and the top half of the Balance Sheet. As soon as we get to trying to eliminate intercompany investments and share capital, we hit a problem. In a word (or two!), pre-acquisition reserves. Nobody knows them. This key component for making the intercompany elimination of investments work is just not known. Suddenly we have a BIG difference on consolidation. Oh, and no, we can’t just assume it’s the difference. There will need to be a proof that the elimination is working correctly, we can’t just take a balancing figure out of the reserves. So, back to the data, rework it, reload convert and aggregate, re-eliminate. And repeat.

Other data issues we see are driven by problems derived from timing differences; different exchange rates in each business, inconsistent FX conversion methodologies such as investments being revalued monthly while share capital is held as a non-monetary item at historic rate (unsurprisingly the two then don’t eliminate).

With this level of complexity in automation and the importance that the calculations are objective, Statutory Consolidation puts a significant burden on data quality and assurance. We put considerable time into helping clients understand that consolidation is so heavily dependent upon the data to function correctly that they need first to be honest with themselves and then us about the quality of that data. Having done this, the consolidation project brings rewards beyond those expected. It improves the quality and the controls in the finance ledger. It makes audits easier in that calculations are objective and come with proofs, it’s consistent and access can be granted to auditors who can drill all the way to transactions in the host system. It also cleans up the balance sheet in particular. Last, but by no means least, with a clean data set for both Income Statement and Balance Sheet it allows Cash Flow automation. What a win!

So, embark upon that Consolidation Automation project, look to the wins it brings your automation, but remember be honest with yourself about the work in your existing process and remember;

“It’s all about the data”

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