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So… how was your annual financial close? 5 common pains and how to remedy.

This is the time of year when most companies are busy closing their annual consolidated books. Some may find this just another close process, while others struggle their way through the data collection, the consolidation, the reporting and the audit. Here’s 5 common issues we see at companies, and what is required to fix them once and for all.

A well-designed and well-governed consolidation system is bound to speed up the annual close process tremendously

1. Group companies spend too much time entering data into the consolidation system

It all starts with collecting single company financial data. When people are spending way too much time entering that data into the consolidation system, this could simply be because the data collection process is not automated; implementing a data integration solution then is an easy fix. Most of the times however, the root cause is more complex. We mostly see poorly governed master data definitions. Do you have a clearly defined corporate chart of accounts, and is it properly embedded within each of the general ledgers? This doesn’t mean that each general ledger necessarily has to be based on the corporate chart of accounts, but there should at least have been done a fit-gap analysis between the ledger accounts and the corporate chart of accounts. Making the effort to close the gaps will definitely smoothen the data collection process.

 

2. The consolidation process requires too many manual adjustments

Once the single company data is in, the consolidation can commence. Intercompany is known to frustrate many a consolidation process. Do you apply strict intercompany policies in your company? Effective policies include a cut off date for sending intercompany invoices; a common rule about who is leading (the seller) and who is lagging (the buyer) in case of disputes; and clear timelines when the matching process is due (preferably a few days before reporting date). Another common issue relates to local accounting policies versus group accounting policies. Who do you hold accountable for that bridge, and where do you post it? The most effective setup is to use a secondary ledger and delegate the ownership for GAAP adjustments to the group companies, rather than having the consolidation team post those adjustments within the consolidation process. Finally, a well implemented set of automated consolidation rules (including equity pick-up rules if and where applicable) can relieve significant pressure from the consolidation process.

 

3. The consolidated cash flow statement is cumbersome to prepare

Most companies elect to report the cash flow statement according the indirect method. An indirect cash flow statement is a peculiar thing. When properly implemented, it is a great instrument to control corporate performance and validate the accuracy of reported income statement and balance sheet data. When poorly implemented, it is a labor intense exercise to prepare with mostly limited value for management. A well-designed cash flow model builds off of a relevant analysis of balance sheet movements, where movements are duly separated between cash relevant movements and non-cash relevant movements. The latter in turn can be separated into amounts posted in income statement, amounts posted in other comprehensive income, and amounts posted in other sections of the balance sheet. Making sure that the logical accounting relations between income statement, balance sheet and cash flow statement are properly reflected makes the difference between a consolidated cash flow statement that is prepared with a push of the button, versus one that takes many days to prepare. Let alone keeping it in sync with any late adjustments.

 

4. The statement of changes in consolidated equity is an ad hoc exercise

Have a look at how you collect equity movement data from each of the group companies. Does it contain an account called “other reserves”, and perhaps also a movement type called “other movements”? If one of the two or even both apply, you’re bound to face problems consolidating the statement of changes in equity. Consider applying proper hygiene. First of all, identify the factual reserves that are applicable to your group and create accounts for each of them. Preferably, create separate accounts for any deferred tax effect on reserves (to be able to validate it against the changes in your deferred tax liability). This should eliminate the “other reserves” account. Secondly, identify the factual movements that you anticipate on those reserves, and create them accordingly. This should eliminate the “other movements”. Having such a clean setup and consolidating changes in equity consistently on every account/movement-combination will allow to fully automate the statement of changes in consolidated equity.

 

5. The notes to the consolidated financial statements are prepared in Excel

In order to prepare the consolidated financial statements you need to collect and consolidate much more information besides the trial balance. IFRS is especially notorious for its many notes that are required, including a whole lot of movement schedules. But notes also include an effective tax rate reconciliation, off-balance commitments, and a maturity analysis of loans and borrowings, to name just a few. Collecting these notes in Excel introduces not just the obvious challenges around currency translation and consolidation, but also introduces weaknesses in terms of data quality and data consistency. A proper consolidation system will allow to define and collect the notes as part of the annual close process, where data quality controls (also called “validations” or “confirmation rules”) enforce the consistency of those notes back to the trial balance. This in turn ensures that after consolidating the notes you are still aligned with the consolidated trial balance.
 
Try doing that in Excel.

 

Do you recognize one or more of the above issues? We’d be happy to quick scan your consolidation system and provide you with a more precise advice how to remedy those issues. If you’re not using a consolidation system yet, and rather still are using Excel to facilitate the annual financial close, we’d be happy to discuss the benefits the proper technology brings to your company. A well-designed and well-governed consolidation system is bound to speed up the annual close process tremendously!

 

Interested in a quick scan?

Contact us now!

Casper van Leeuwen is executive partner at Satriun, an international Corporate Performance Management consultancy with offices in the Netherlands, Switzerland, France, Germany, Romania, Israel and Belgium. Satriun advises large corporations in the areas of financial consolidation, budgeting & planning, and management reporting. 

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