Local financial statements vs. reporting for consolidation

One of the particular challenges around working with consolidated financial statements is having two sets of numbers to relate to.

  • One set of numbers for the consolidated financial statements
  • And another set of numbers for local financials.

In this blog we show you how to keep track of both and make sure you comply with both local accounting regimes and global financial standards.

Why do you have different set of numbers?

It may seem like a suspicious kind of accounting to have two sets of numbers, but let’s just clarify what we mean exactly: the basic accounting is obviously the same.

Debit and credit is the same in Germany, Denmark, Sweden – in fact, debit and credit is a global language, accepted and understood by accounting people across the world!

When you account for a sales transaction, a purchase of goods and services, or when you pay salaries to employees, this is pretty much done in the same manner across the globe.

But, when it comes to the accounting items, where a certain degree of judgement is involved, you will often find differences in the accounting guidelines from one country to the next.

Let us illustrate it with a few examples:

  • Depreciation of tangible fixed assets: you will often find that different countries set depreciation over different periods. Or, only allows certain depreciation methods.
  • Allow interest to be capitalized as a component of fixed assets or inventories.
  • Include financially leased assets in the balance sheet, or not.
  • Allow deferred tax assets to be recognized in the balance sheet, or not.

Of course, you have globally accepted and aligned accounting frameworks – IFRS, for example – which are used in a number of countries and ensures consistent reporting in the consolidated financial statements. IFRS would often be ‘the language’, in which you report the set of numbers used for consolidation. But that does not eliminate the challenge of different sets of numbers, because local entities still have to report local financial statements for statutory purposes, or as part of local tax regimes.

Memory is short – accounting is forever

Well, although you have different sets of numbers, it shouldn’t be that difficult.

Maybe you will have 8 to 10 deviations from one set of numbers to the other – a few different principles on depreciation, a deferred tax asset being recognized or de-recognized; something like that.

Not all that difficult.

So, why is it that carrying this forward is so tricky?

We have probably all tried to take over a spreadsheet from someone else and had to dissolve the numbers and sources they came from. In fact, just looking back at a spreadsheet you prepared yourself a year ago, trying to think of the reasons for numbers that went in there is troublesome!

Undoubtedly the main root causes for your problems comes from this:

  • Is the adjustment coming top-down or bottom-up?
    In consolidation, you occasionally re-value a local asset or a local liability on group level. A local asset impairment is reversed, or an accounting obligation is derecognized, as examples of this. Maybe these adjustments are ‘pushed down’ to local reporting, and the source for this could even be outside out of your own accounting circle. Maybe that’s why you don’t recognize the number.

  • Is the adjustment an amount or an allocation rule?
    e., are you completely removing an asset, because it should not be capitalized in your consolidated numbers – for instance a tax asset, which is not to be included in your consolidation numbers. Or, are you removing a 10% inter-company profit on year-end inventory from your numbers, but entered that as a number instead of a calculation within a spreadsheet?

  • Is the adjustment really a reclassification?
    Often, you reclassify or eliminate a few things, when you do you consolidation: intercompany sales and purchases are obvious examples, and the corresponding intercompany receivables and debts, of course. In your spreadsheet, those reclassifications may appear side by side with other adjustments and allocations, just to add to the complexity of it all….

Most of the information kept in short-term memory will be stored for approximately 20 to 30 seconds.
Yes, you clearly understood the reason for a deviation that was adjusted in your reported numbers or your consolidation spreadsheet, when you did it.

But a year from now?

Probably you should have entered a little more text in your spreadsheet, instead of going out to dinner when your consolidation finally matched up that late January evening last year.

How can you structure your work, so you don’t have to rely on your short-term memory?  

It might sound banal, but in the light of how complex consolidation is let this be your reminder that it takes more than a great memory to keep track of your numbers in a spreadsheet consolidation solution.

If you try to retain a phone number for just a few minutes your memory will be a great help, but if you try to recall the  same number a year from now it will be almost impossible. The same rule your can apply to your consolidation.

So, the number one thing you should do to help your memory is to structure your data, so you (and others) won’t have to rely on your memory alone. In other words stop trying to keep track of all your numbers in a spreadsheet solution and start looking for an actual consolidation tool that will help you clearly see which numbers came from which local source systems vs. adjustments made during the consolidation process.

Also, in a structured system you make your adjustments as formal journal entries, not just spreadsheet formulas – or even worse: just plain numbers in spreadsheet cells. The system makes sure you cannot post a one-legged entry – your debits and credits need to match, even in consolidation.

And remember, you still have to satisfy local requirements in accounting. Your local auditors still need to be satisfied, not just the group auditors.

If you are a CFO, Finance Manager or Controller in an SME’s, and do the consolidation just once a year it makes it even more difficult to remember those different sets of numbers, so for you a formalized structure is a must in order to avoid errors that come from spreadsheet formulas or plain numbers in spreadsheet cells.