Companies that operate as part of a wider corporate group encounter financial reporting at two different levels. At one level, they have the local month-end close. This involves the finalisation of the individual company’s own accounts. At another level, there’s group financial reporting. This involves gathering and standardising financial data from the parent company and its subsidiaries, then performing financial consolidation to present the group’s financial performance and position as one economic entity.
These two processes are connected in many ways, and monthly group reporting builds on the local close. For example, to accurately complete a group financial report, accounting data from the local month-end close is required. However, they serve different purposes.
What is group financial reporting?
Group financial reporting is generally harder to complete than a local month-end close. It requires importing and standardising data from multiple entities and eliminating intra-group transactions for group consolidation, which presents many issues. Specialist software can support this process, and many group CFOs and controllers, for example, turn to Emfino for transaction-level consolidation software. Financial consolidation tools that work with transaction-level general ledger data can provide understanding and transparency behind consolidated results through drill-downs to underlying transactions and consolidation entries. These tools can also automate data validation and currency translation.
There are many aspects of group financial reporting that make it difficult and confusing. Each entity will likely use its own accounting systems, charts of accounts, currencies, and reporting formats. The parent company’s finance team is responsible for gathering all the individual data sets into a single, standardised data set.
Group financial reporting is conducted in order to give the parent company a sense of the entire group’s financial standing. It is also done to compare and contrast the performance levels of different subsidiaries.
What is a local month-end close?
A local month-end close is the process a single company uses to finalise its own financial records for a particular month. The goal is to determine the performance and financial position of the individual legal entity. The parent company can then take this information to complete a group financial report.
Local month-end closes can involve various components, including:
● Reconciling bank accounts
● Checking invoices
● Recording accruals and prepayments
● Reconciling inventory
● Reviewing accounts receivable and payable
● Making sure transactions have been recorded correctly
With all this information collected, an individual company can create its own profit and loss statement and balance sheet.
Why is group reporting more difficult?
Group financial reports require local month-end close data for each company. However, the parent company’s finance teams also require various other components to create accurate group reports.
As aforementioned, a standardised data set must firstly be created. This can be complicated and create a lot of confusion, especially if it’s performed without adequate consolidation software.
In addition to this, group finance teams have to perform the complicated financial consolidation process where transactions and balances between group companies must be identified and eliminated. These transactions include intercompany sales, purchases, loans, receivables, payables, and interest charges. With advanced transaction-level consolidation software, the consolidation process can be automated, as the system can automatically eliminate intra-group transactions and balances, reducing the need for group finance teams to request additional information from subsidiaries, provided the necessary detail is available in the source data and consolidation rules are configured.
The main difference is the purpose
Overall, the main thing that makes group financial reporting different from a local month-end close report is the purpose.
A group financial report aims to answer: How are all the subsidiaries in the group doing financially, and what are the group’s overall consolidated results?
A local month-end close answers: How did the individual company perform this month?
