Getting International Accounting Consolidations Right

As a finance controller, I oversee the complex process of consolidating global financial accounts and ensuring accurate reporting across all entities including our subsidiaries in India and the UK and elsewhere. This requires extensive knowledge of technical accounting principles and coordination to manage a high-performing global team.

On a daily basis, I work with regional controllers to ensure proper recording of transactions across all subsidiaries and standardization of accounting policies. My team handles monthly consolidations, currency translations, intercompany eliminations, and segment reporting. I have optimized and automated most of our processes to enable faster financial closes. We do a?monthly close and an official Quarterly close. The cash reconciliation used to take some time to do but I have also automated the process.? And as controller, a core part of my role is staying current on GAAP and IFRS to guide consolidation decisions. Key considerations include:

Evaluating ownership and control to determine consolidation requirements, which differ slightly between GAAP and IFRS.

Eliminating intercompany transactions such as AR/AP balances, inventory transfers(If any) and allocation of shared expenses between entities.

Maintaining detailed transfer pricing documentation.? Each software is different and yet the functions have to be completed. And remember all these modules cost extra but it’s something that can save you time.? Here’s a quick rundown of the impact to your financial statement, and SEC and public accounting standards.? We then discuss various platforms and the requirements they should fulfill.??

Doing it Correctly and the Impact on your Finances

Converting financial statements denominated in foreign currency involves adjusting balance sheet accounts using current exchange rates and income statements using weighted average rates, all while ensuring adherence to Compliance Monitoring & Recording standards for translation adjustments.

Translation of Financial Statements: When you consolidate financial statements from branches or subsidiaries located in different countries, you need to translate their financial data into a common reporting currency (we do everything in USD). Exchange rates are used to convert local currency amounts into the reporting currency. Fluctuations in exchange rates between the time of transaction and the time of consolidation can lead to differences in the translated amounts. This impacts line items such as revenues, expenses, assets, and liabilities in the consolidated financial statements.??

Impact on Income Statement: Exchange rate fluctuations can affect both revenues and expenses. If the local currency of a subsidiary weakens against the reporting currency, revenues generated in that currency will be worth less when translated. For Example, If the subsidiary company currency in GBP weakens against the primary company where currency in USD it will lower the revenue generated from Subsidiary company. Typically we try to get a sense of what the revenue impact is and without the currency so that we can have a basis of consistent comparison.?

Conversely, if the local currency strengthens, the translated revenues will be higher. The same applies to expenses. This can lead to variations in the reported operating income and net income.

Impact on Balance Sheet: Exchange rate changes can affect the value of assets and liabilities on the balance sheet. If the local currency weakens, the value of assets and liabilities denominated in that currency will decrease in terms of the reporting currency. Similarly, a strengthening local currency would lead to higher translated values. This affects metrics like total assets, total liabilities, and equity.

Translation Gains/Losses: The differences arising from translating financial statements at different exchange rates can lead to translation gains or losses. These gains or losses are reported in the equity section of the consolidated balance sheet. They don't affect the company's operating performance but can impact overall equity.

Hedging Strategies: Companies may use hedging strategies to manage FX risk. These strategies involve using financial instruments to mitigate the impact of exchange rate fluctuations. The effectiveness of these strategies also needs to be accounted for and disclosed in financial statements.

Cash Flow Impact: Exchange rate fluctuations can affect the cash flows of international operations. Transactions denominated in different currencies can lead to foreign exchange gains or losses. These fluctuations can impact the company's overall cash flow from operations.

Compliance to SEC and Accounting Standards

Ensuring consolidated reports properly combine all controlled subsidiaries globally. Disclosing consolidation rules, restrictions, and noncontrolling interests.

I work closely with external auditors to confirm compliance with SEC regulations and accounting standards.

GAAP Requirements: Generally Accepted Accounting Principles (GAAP) provide the framework for how companies should prepare and present their financial statements. The relevant GAAP standards for intercompany consolidations include:

There are additional details from Deloitte highlighted below:

ASC 810 - Consolidation: Accounting Standards Codification (ASC) 810 provides guidance on how to determine whether a company should consolidate the financial statements of its subsidiaries. It outlines criteria such as control, ownership, and decision-making power to determine when consolidation is necessary. ASC 810 also addresses the treatment of intercompany transactions, profits, and losses.

ASC 830 - Foreign Currency Matters: This standard provides guidance on accounting for foreign currency transactions and translation of financial statements into a reporting currency. It's particularly relevant when consolidating financial statements from subsidiaries that operate in different currencies.

ASC 850 - Related Party Disclosures: ASC 850 outlines the requirements for disclosing related party transactions in the financial statements. This is important for disclosing intercompany transactions that might impact the accuracy and transparency of the financials. Many companies get flagged for not including enough disclosures.

ASC 815 - Derivatives and Hedging: If your company uses hedging strategies to manage foreign exchange risks associated with intercompany transactions, ASC 815 provides guidance on accounting for derivatives and hedging activities.

Some software platforms to help perform International Consolidations:

SAP Business One: SAP Business One offers multi-currency and multi-company capabilities. It can handle international consolidations, allowing you to consolidate financial data from subsidiaries located in different countries and currencies.

Oracle NetSuite: NetSuite provides decent financial consolidation features. It enables companies to consolidate financial data from global subsidiaries in real-time, handling multiple currencies, and offering advanced reporting and analytics.

Microsoft Dynamics 365 Finance and Operations: This ERP solution by Microsoft includes features for multi-entity management and international consolidation. It allows larger companies to automate financial reporting and consolidation processes across subsidiaries, providing real-time insights into financial performance.

Workday Financial Management: Workday's cloud-based financial management software includes tools for handling global consolidations. It supports multi-currency reporting and enables companies to manage financial data from subsidiaries in various locations.

OneStream XF: OneStream XF is a unified corporate performance management (CPM) platform that includes financial consolidation features. It supports multi-currency consolidation and offers automation for financial reporting across global subsidiaries.

Prophix: Prophix is a CPM software solution that includes features for financial consolidation. It allows companies to automate the consolidation process for subsidiaries in different currencies, providing accurate and timely financial reports.

HFM (Hyperion Financial Management): HFM, now part of Oracle's EPM suite, is designed for large enterprises and offers advanced financial consolidation capabilities. It supports multi-currency consolidations and provides features for intercompany eliminations and adjustments.

How We do it Currently with Sage Intacct:

Multi-Entity Management: Sage Intacct allows you to manage and consolidate financial data from multiple entities and subsidiaries. You can maintain separate books for each entity such as our India and UK subs, while still being able to generate consolidated financial statements.

Multi-Currency Capabilities: The platform handles transactions and reporting in multiple currencies, which is crucial for companies dealing with subsidiaries operating in different countries. It supports currency conversion and allows you to consolidate financial data accurately.

Intercompany Transactions: Sage Intacct offers tools for managing intercompany transactions and eliminations. This is essential for ensuring accurate financial reporting by eliminating transactions between related entities.

Consolidated Reporting: You can generate consolidated financial statements, including balance sheets, income statements, and cash flow statements. The platform provides customizable reporting options to meet your specific consolidation requirements.

Specific functions Your Software Must include:?

Regardless of which platform you choose, here are the key considerations:

Data Integration: The software would need to connect with various financial systems used by different entities within a multinational corporation. This integration ensures that accurate and up-to-date financial data related to AR balances, AP balances, inventory levels, and shared expenses is available for processing.

Automated Reconciliation: The software would automatically reconcile intercompany AR and AP balances. It would identify and match outstanding invoices, payments, and credits between different entities to ensure accurate financial reporting and eliminate the need for actual cash transfers.

Inventory Transfer Optimization: For inventory transfers, the software would optimize the movement of goods between entities. It would consider factors such as demand, supply chain efficiency, and transfer pricing rules to minimize costs and maintain balanced inventory levels.

Expense Allocation: The software would allocate shared expenses (such as G&A cost, marketing expenses, etc.) among different entities based on predefined allocation methods. This ensures that each entity bears a fair share of the shared expenses while complying with transfer pricing regulations.

Transfer Pricing Compliance: The software would maintain detailed transfer pricing documentation in accordance with local and international regulations. It would capture and store relevant data, such as comparable transactions and pricing methodologies, to substantiate transfer pricing decisions.

Automated Documentation Generation: On a regular basis, the software would generate detailed transfer pricing documentation reports. These reports would outline the rationale behind transfer pricing decisions and provide supporting evidence to demonstrate compliance with regulations.

Audit Trail and Transparency: The software would maintain a comprehensive audit trail of all intercompany transactions and related processes. This ensures transparency and accountability in case of audits or regulatory inquiries.

The software would continuously monitor changes in transfer pricing regulations and tax laws. It would provide alerts and updates to ensure that the corporation's intercompany transactions remain compliant with the latest requirements.

Keep a Global view

In addition to consolidation, I oversee all aspects of global finance including FP&A, treasury, tax, procurement, and expense management. I have implemented new systems for improved reporting and efficiency.

With extensive technical accounting expertise and experience leading global teams, I leverage my skills to scale company finances globally while ensuring integrity, compliance, and visibility into worldwide performance.