Standardize, Centralize, And Automate Your Corporate Close: Step 2

Elizabeth Milne

Part 13 in the Continuous Accounting Series

Following on the previous post in this series, let’s take a closer look at the financial consolidation process. With globalization, complex entity structures, increasing intercompany trading relationships across countries and currencies, and new reporting regulations, getting a handle on financial consolidation has attracted renewed interest.

Sheer complexity is a significant issue for most global enterprises. In a recent survey of over 1,000 companies by EY, over 60% had more than 10 legal entities, and nearly half were dealing with more than 10 reporting standards, with over 30% indicating 16 or more different reporting systems. That’s a lot of complexity!

From a corporate reporting standpoint, all of this means time and risk. In the previous post, we discussed best practices to standardize processes for financial reporting and to manage detail and trial balance inflows from local entities to corporate. Financial consolidation, the next step, is about mapping the different GLs to a common, “mezzanine” corporate chart of accounts, managing intercompany eliminations and currency translations, making necessary adjustments, and then producing consolidated reports.

While financial consolidation applications can help handle the mapping process and ensure a strong audit trail, surprisingly (or perhaps not!), many financial consolidation processes still happen in spreadsheets, with complex and brittle VLOOKUPS mapping across accounting structures and currency rates. These aren’t just hard to maintain; they pose a significant risk, especially with changing organizational and accounting structures over time.

Centralizing and automating chart-of-account mappings

An essential part of any consolidation process is mapping accounts from different charts of accounts to the corporate GL, often across different accounting periods. Mappings often vary, from one-to-one account mappings to one-to-many. Further complexity can arise with changing account structures, where new accounts are added at corporate or within entities, requiring new mappings. Moving to a rules-based, centralized approach for mapping accounts is essential to maintain account consolidations across many entities and many different dimensions.

One example is to create rules to automatically aggregate data if multiple subsidiary GL accounts map to a single consolidated account based on the accounting structures of different entities. Older financial consolidation apps can make it painful to change account mappings, while newer technology enables self-service by accountants to update mapping and aggregation rules themselves.

Managing intercompany eliminations

Managing intercompany transactions and eliminating them is often a major driver to move off spreadsheets and automate. New regulations like Base Erosion and Profit Shifting (BEPS) have put a further spotlight on intercompany transactions, increasing the need for a clear, centralized perspective of intercompany processes for tax reporting.

In a nutshell, intercompany transactions are those that happen between entities within the enterprise, whether upstream (from subsidiary to corporate), downstream (from corporate to subsidiary), or horizontally (between subsidiaries). Failure to eliminate them results in an inaccurate view of the enterprise’s financials. Types of intercompany eliminations vary, including eliminating revenue and expenses, intercompany debt, and stock ownership. Additional complexity often arises if a subsidiary is partially owned, which brings the need to allocate to minority and majority interests.

Some of the challenges that can overwhelm corporate accounting teams are the volume of intercompany transactions and a lack of supporting documentation, such as pricing and agreements. The key with intercompany eliminations is to centralize with an audit trail, ideally with the documentation behind each transaction, to ensure substantiation behind consolidated balances. It’s hard to do it with spreadsheets and manual processes alone.

At scale, automation can provide significant efficiencies, with technology like robotic process automation (RPA) that can apply rules to intercompany transactions to automatically eliminate them and raise red flags by exception. Intercompany repositories can act as a clearinghouse for transactional detail.

Managing currency translations

When preparing consolidated financial statements that include a foreign subsidiary, the financial statements of the foreign subsidiary need to be translated into the reporting currency of the parent. One of the biggest problems is that the currency rate used for consolidating an entity can vary, whether dealing with assets and liabilities, income statement items, allocations, different balance sheet dates, or profit eliminations.

Managing currency rates, involving mapping rates based on which date, in turn based on which kind of transaction, can create significant risk as well as manual overhead. You can reduce workload and improve reporting integrity with a single version of the truth for currency rates, using business rules and automation to apply the right currencies in the right situation, and enabling accounting to easily identify why a rate was used when looking at a given balance.

Management, financial reporting, and planning flexibility

My next blog will go into more detail. But financial consolidation doesn’t stand alone. In additional to being essential for financial reporting and ultimately disclosure, it is also the system of record for management reporting, as well as planning and modeling. As such, dimensional flexibility to support both management and financial accounting, performance for ad hoc analysis, and planning and modeling functionality are all essential. Otherwise, data flowing from the financial consolidation system will quickly devolve back into spreadsheets or other separate apps, creating manual or brittle integration points.

The key to rethinking any financial consolidation is automation in detail. Many financial consolidation tasks are detail-oriented and repetitive, such as performing eliminations. Others are highly error-prone, like mapping account structures. With automation, accounting organizations face two poor choices: a fast close that risks errors, or a slow close that screens them out at a substantial resource cost. Using automated rules to process mappings, apply currencies, and look up eliminations provides consistency and helps accounting organizations scale.

Centralizing mappings, intercompany data, and other areas simplify maintenance and provide an audit trail. New cloud applications that handle the processes can be deployed quickly and enable accounting to take control and make changes themselves. There has never been a better time to rethink financial consolidation processes.

Learn how organizations are gaining instant financial insights and using them to make better decisions – both now and in the future. Register now for the 2017 Financial Excellence Forum, Oct. 10-11 in New York City.

Follow SAP Finance online: @SAPFinance (Twitter) | LinkedIn | FacebookYouTube


Elizabeth Milne

About Elizabeth Milne

Elizabeth Milne has over 20 years of experience improving the software solutions for multi-national, multi-billion dollar organizations. Her finance career began working at Walt Disney, then Warner Bros. in the areas of financial consolidation, budgeting, and financial reporting. She subsequently moved to the software industry and has held positions including implementation consultant and manager, account executive, pre-sales consultant, solution management team at SAP, Business Objects and Cartesis. She graduated with an Executive MBA from Northwestern University’s Kellogg Graduate School of Management. In 2014 she published her first book “Accelerated Financial Closing with SAP.” She currently manages the accounting and financial close portfolio for SAP Product Marketing. You can follow her on twitter @ElizabethEMilne