The Art of Financial Consolidation

01 Jun 2016

Kevin Hsu

Kevin Hsu is a co-founder of Kepion Solution, driving innovations in areas of business intelligence and analysis for mid-size to global enterprise companies. With more than 10 years of industry experience in developing and delivering BI solutions for customers internationally, Kevin is a key stakeholder in the success and growth of Kepion.

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Financial consolidation is highly technical

Let’s be realists here – if preparing consolidated financial statements was not highly technical, no one would complain about how labor intensive, challenging, or frustrating the process is. It can be difficult enough to compile a single company’s transactional data into quarterly and monthly sets of statements. But IFRS 10 requires companies to present the financial activities of the company itself, its subsidiaries, and any other entity in which it has a “controlling interest,” as if it were all one big, single company. The rules under U.S. GAAP are even more technical, accounting for controlling interests differently from non-controlling interests through many FASB statements, and endless revisions to those statements.

Additionally, if creating periodic consolidated financial were easy, everyone would be content to continue producing them on spreadsheets. But monthly financial consolidations have historically been all these things … and more.

That’s because consolidations need to pull together vast amounts of data from different departments, different entities, and even differing geographical regions with varying accounting rules, and compile the data into one comprehensive statement of the state-of-the-parent-business that everyone will depend upon to make forward-looking decisions. Make a mistake here, and it costs you plenty down the road.

Business intelligence: helping finance professionals get smarter consolidation

With the increasing complexity of businesses and the accelerating pace of change in the business environment, decision-makers can no longer wait two to three weeks for a monthly consolidation to be published using 1950s-era methods. Today’s finance professionals depend on consolidation software that provides business intelligence (BI) – big data analytics made accessible across an organization. BI provides the capacity for real-time analysis of enormous amounts of data, rolling budgets, and visual representation of aggregate data through dashboards and scorecards.

Once viewed as a periodic element of the business process, the financial plan has become a living, breathing thing within the corporate sphere, and continual updates using up-to-date information allows the company to keep on track of all developments.

Regular financial consolidation with real-time data is increasingly being seen as a financial best practice, as regulatory compliance becomes more stringent.

Financial consolidation as a work of art

That is why nothing creates more headaches for the finance department than multiple versions of the truth. Obtaining that prized, single version is further complicated because accounting is not a strict science, but rather a form of art which reveals its own inherent structure as it is utilized and studied. Finance professionals ply their art though accounting assumptions as part of their reporting process. But when those assumptions need to be made across multiple departments and entities (each with millions of points of data) it can quickly become overwhelming.

Kepion’s financial consolidation software automatically aggregates that mountain of data and outputs a single version of the truth – without the frustration, intensive labor, or spreadsheet-induced errors. It’s as if you were staring at a painting canvas up close – all you see would be the individual paint spots. But as you gain appropriate distance from the canvas, those individual dots would coalesce into a Monet masterpiece, allowing you to clearly see the big picture in sharp detail.

Most business entities, for example, like to think of themselves as “an ongoing concern.” Thus, an implicit assumption in their financial reporting is that they will be able to collect on their accounts receivable, pay their liabilities, and be around to see tomorrow’s developments. If an entity or department needs to be spun off – or worse yet, closed altogether – it changes the whole accounting picture. Even relatively simple accounting choices, such as how inventory is valued, can dramatically change the financial statements (or even invalidate them in certain accounting jurisdictions).

These assumptions don’t have a number attached to them – but they affect the reporting of the numbers, much like the painter’s choice of substrate is not the painting. However, painting on canvas produces a very different effect than painting on paper or on the side of a building. And the choices that underlie the presentation of the finished work are just as much a part of the artwork as the art itself. This is true regardless of the type of art you are considering.

Within art circles, a genuine masterpiece is considered the work of an artist who, through being swept up in the spirit of his or her times, manages to transform personal experience into that which is universal. The masterpiece causes us to forget the artist and focus on the art itself. Listening to the symphony, reading the literary work, or being swept up in the painting, the artwork expands the recipient’s consciousness and lifts his or her spirit higher – if even for a moment.

A good set of consolidated financial may not expand your consciousness or cause you to be swept away by the accountant’s mastery – and for the purposes of financial reporting that is probably a good thing. A good set of financial will not draw attention to the accountants, their assumptions, or the underlying principles except, perhaps, in a cursory way by means of a footnote. Rather, they will provide a clearer understanding of the company, the entities it controls, and how well it has performed in the recent past in such a way that investors and stakeholders can make the best possible reasoned decisions and compare the company to very different companies on a common basis. In this sense, consolidated financial reporting is a very special kind of artwork, perhaps only truly appreciated by an elite group. But it is an artwork upon which much of the world’s economies trust and depend.

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