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What are the steps to prepare financial reports for multi-national corporations?

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Preparing financial reports for multi-national corporations (MNCs) can be a complex and challenging task. MNCs operate in different countries, currencies, tax regimes, and accounting standards. They need to consolidate and present their financial performance and position in a clear and consistent way for their stakeholders. In this article, we will discuss the main steps to prepare financial reports for MNCs, and some of the issues and best practices involved.

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Tomi Akinwale ACCA, ACA, ACTI, B.TECH, FMVA, AAT.

Tax | Deloitte | Financial Reporting & Modelling |
Rick Yvanovich FCMA CGMA FCPA MSc CCMP CCMC CBC

Certified Chief Master coach, entrepreneur, author, and speaker | Bridging technology, accounting, and people, I’m a…

1 Identify reporting entities

The first step is to identify the reporting entities that make up the MNC. These are the legal entities that the MNC owns or controls, either directly or indirectly, through subsidiaries, joint ventures, associates, or other arrangements. The MNC needs to determine the degree of control and influence it has over each entity, and apply the appropriate accounting method to account for its share of the entity's assets, liabilities, income, and expenses. For example, the MNC may use the full consolidation method for subsidiaries, the equity method for associates, or the proportionate consolidation method for joint ventures.

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Tomi Akinwale ACCA, ACA, ACTI, B.TECH, FMVA, AAT.

Tax | Deloitte | Financial Reporting & Modelling |
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You first have to identify all the reporting entities so as to know which jurisdic persons are involved in the preparation. This will also help in planning for a group audit.

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2 Translate foreign currency transactions

The second step is to translate the foreign currency transactions of each reporting entity into its functional currency. The functional currency is the currency of the primary economic environment in which the entity operates, and reflects the currency that mainly influences its revenue and cost. The MNC needs to apply the relevant exchange rates to translate the foreign currency transactions, such as the spot rate for cash flows, the average rate for income and expenses, and the historical rate for non-monetary items. The MNC also needs to recognize any exchange differences that arise from the translation process, either in profit or loss or in other comprehensive income, depending on the nature of the transaction.

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Rick Yvanovich FCMA CGMA FCPA MSc CCMP CCMC CBC

Certified Chief Master coach, entrepreneur, author, and speaker | Bridging technology, accounting, and people, I’m a catalyst inspiring human transformation for consistently higher achievement.
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I'd advocate that any MNC should not tie itself into a single base currency accounting solution else yes this step becomes a tricky one. I'd recommend using a multiple base currency system such that the accounts are maintained contemporaneously in the different currencies then this step is hardly required.

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3 Adjust for differences in accounting policies

The third step is to adjust for any differences in accounting policies among the reporting entities. Accounting policies are the specific principles, bases, conventions, rules, and practices that an entity applies to prepare and present its financial statements. The MNC needs to ensure that the accounting policies of each reporting entity are consistent with the accounting policies of the parent entity, and comply with the applicable financial reporting framework, such as International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (US GAAP). The MNC needs to make any necessary adjustments to align the accounting policies, and disclose the nature and amount of the adjustments in the notes to the financial statements.

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4 Eliminate intercompany transactions and balances

The fourth step is to eliminate any intercompany transactions and balances among the reporting entities. Intercompany transactions are the transactions that occur between two or more reporting entities within the MNC, such as sales, purchases, loans, dividends, or management fees. Intercompany balances are the amounts that are owed or receivable by one reporting entity to another within the MNC, such as trade receivables, trade payables, loans, or equity. The MNC needs to eliminate these transactions and balances to avoid double-counting or overstating the income, expenses, assets, or liabilities of the MNC as a whole.

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5 Consolidate financial statements

The fifth step is to consolidate the financial statements of the reporting entities into the financial statements of the MNC. The financial statements are the statements that show the financial performance and position of an entity, such as the statement of profit or loss, the statement of financial position, the statement of changes in equity, and the statement of cash flows. The MNC needs to aggregate the line items of the financial statements of each reporting entity, after applying the previous steps, and present them as the financial statements of the MNC. The MNC also needs to disclose the information about the composition, structure, and activities of the MNC and its reporting entities in the notes to the financial statements.

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6 Analyze and communicate financial results

The final step is to analyze and communicate the financial results of the MNC to its stakeholders. Stakeholders are the parties that have an interest or influence in the MNC, such as shareholders, creditors, regulators, customers, suppliers, employees, or the public. The MNC needs to interpret the financial statements and provide insights into its performance, position, cash flows, risks, opportunities, and strategies. The MNC also needs to communicate the financial results in a clear, concise, and relevant way, using different channels and formats, such as annual reports, press releases, presentations, or webinars.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Mannir Musa, ACA, ACTI, MBA

Career Coach
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Ideally there should be uniform accounting policies across the member firms. This will ease the consolidation process and save resources. Also, MNC and it's member firm should have a uniform accounting year end. This is important for the purposes of both external reporting and internal reviews.

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Rick Yvanovich FCMA CGMA FCPA MSc CCMP CCMC CBC

Certified Chief Master coach, entrepreneur, author, and speaker | Bridging technology, accounting, and people, I’m a catalyst inspiring human transformation for consistently higher achievement.
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It's not uncommon that over time different entities in the same or different jurisdictions do not follow a uniform policy or coding. Ideally this is avoided, though its no 100% avoidable. The mitigation is to have a group policy / coding and entities need to remap to that. These days an Enterprise Performance Management (EPM) system can handle the multiple jurisdiction consolidation in an auditable way (eg elimination journals are easily auditable) and when this is combined with a flexible Accounting ERP that can handle multiple charts of accounts, then its all a bit of a breeze. I know I'm biased, but I remain surprised how many MNCs still use Excel (which isn't properly auditable) to consolidate, I hope you're not one of them!

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What are the steps to prepare financial reports for multi-national corporations?

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1 Identify reporting entities

2 Translate foreign currency transactions

3 Adjust for differences in accounting policies

4 Eliminate intercompany transactions and balances

5 Consolidate financial statements

6 Analyze and communicate financial results

7 Here’s what else to consider

Corporate Accounting

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