Whitepaper. GL Consolidation. Published on: August 2011 Author: Sivasankar. Hexaware Technologies. All rights reserved.

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1 Published on: August 2011 Author: Sivasankar Hexaware Technologies. All rights reserved.

2 Table of Contents 1. General Ledger Consolidation - Making The Right Moves 2. Problem Statement / Concerns 3. Solutions / Approaches 4. Summary Hexaware Technologies. All rights reserved. 2

3 General Ledger Consolidation - Making The Right Moves General ledger consolidation is the period-end process of combining the financial results of separate subsidiaries with the parent company to form a single, combined statement of financial results. General ledger consolidation is a planned termination of accounting ledger activity. The consolidation can be done for business divisions/activities, accounting subsidiary ledgers and time periods (monthly, quarterly, and annual). Today s companies face a vast range of complex financial reporting and consolidation requirements, and ever-increasing scrutiny by internal/external stakeholders. The general ledger is the core of the company s financial records. The general ledger constitutes the center of the accounting book keeping in a business enterprise. Every transaction flows through the general ledger. These records remain as a permanent track of the history of all financial transactions of the company. Problem Statement / Concerns The Consolidation process As an organization grows, there is an increase in the difficulty of its financial consolidation and reporting processes. The business enterprises must deal with multiple currencies, various accounting standards, and a host of reporting and compliance regulations, including International Financial Reporting Standards (IFRS), integration of new business units into the financial reporting chain and electronic filing of financial statements in Extended Business Reporting Language (XBRL) format. Through all this, the business enterprise must balance the need for precise financial reporting and corporate governance with the needs for timeliness in meeting reporting deadlines. The objectives, challenges while implementing a process for general ledger consolidation includes: Data control: The data in the general ledger extract is sensitive and confidential in nature. Therefore there should be control on access to parts of GL data, by the finance executives. Intercompany transactions: The finance team should have the ability to match and treat inter-company transaction and resulting balances. Adjustment entries: The closing journal entries may form a major part of the consolidating activity. Therefore there should be a facility to pass additional journal entries on the general ledger data. Configuring rules dynamically: The analyst in the finance team should be able to configure rules dynamically, which can be run to calculate financial metrics. Support for multi-currency: The consolidation activities would include applying various translation methods for merging results in multiple operating currencies. For many finance executives, consolidating month end financial and operating results remain a difficult and time consuming task. Often as a result of merger and acquisition activity, the finance team faces the daunting task of consolidating data from multiple source general ledgers using spreadsheets. Such source data are difficult to maintain and audit. The lack of standardization and control in the tedious monthly close process means more avenues for material mis-statement. Hexaware Technologies. All rights reserved. 3

4 Solutions / Approaches The financial reporting requirements in general ledger consolidation come from a variety of sources and can be very complex. Regulatory scrutiny has never been higher-especially as a result of the Sarbanes-Oxley Act (SOX) in the United States and International Financial Reporting Standards in Europe. There are various approaches and software packages, which can help companies, automate the consolidation and reporting cycle. Today, many business enterprises are resorting to financial consolidation software that provide audit trails and permanent storage of consolidated results. Such data is available for access by internal and external stakeholders. The use of technology in general ledger consolidation provides a control mechanism ensuring appropriate statutory and management reporting. There is a growing trend among business enterprises to make usage of technology, as part of their internal control evaluations, resulting in better confidence levels with external auditors. The financial consolidation tools bring together trail balances and other information from multiple general ledgers, ERP systems and other transaction systems. The actual results from one or many transaction ledger would be typically loaded into a consolidation application. Many consolidation applications support an electronic publishing standard such as XBRL. Some of the features given by consolidation engines are statutory and management reporting, complex currency translations, intercompany transaction accounting, minority interest, audit trails, journal entry adjustments, supporting electronic publishing standards etc. Table below describes the core activities of a consolidation process and how the functionality can be achieved with ease by using a Business Intelligence based Consolidation Engine. Activities Without BI Tool With BI Tool Modeling for shift in shareholding pattern during the accounting period Computation of pre/post acquisition profits Treatment, elimination of intercompany transactions Accounting for investments in subsidiaries Maintain different types of entities like parent, holding company, subsidiary, group, business combination etc Disclosure of minority interests Modeling journal entries for consolidation Analyze impact of impairment of assets Adjustments for difference in closing periods Maintain different translation rate methods Maintain details of foreign currency conversions Accounting for dividends declared within the group Executed for each GAAP requirement Manually maintain different sets of books with control balances Updated separately during the consolidation activity Manual computation Data collection and updating manually Manual computation and adjustment Manual computation and adjustment Manual computation and adjustment Directly picked through data integration tools Handled through 'Rules' written by the analyst Handled by default consolidation model Handled by 'Rules' for multiple GAAP requirements Creation of multiple chart of accounts Separate account created with specific 'Rules' Handled through specific journal tasks 'Rules' written by the analyst Handled by default consolidation model Handled by currency dimension Usage of Rate/Plug accounts Handled through 'Rules' written by the analyst Hexaware Technologies. All rights reserved. 4

5 The business intelligence consolidation & reporting applications are used by finance teams in midsize-to-large publicly traded corporations to structure and automate the monthly or quarterly aggregation of historical results. These applications embed rules, procedures, and techniques with an accompanying methodology, fulfilling specific statutory/legal reporting requirements associated with the period-end financial close. Such standards include the local GAAP and the IFRS. The consolidation applications enable setting up of configuration, which results in automatic matching of inter-company transactions. The business user would be able to generate a customized report on the list of inter-company transactions for elimination. Financial consolidation tools enable highly efficient collection and consolidation of data from diverse sources. They offer process management for tight control of the review/approval workflow, data validation, currency translation to support multiple local currencies and automatic elimination of inter-company transactions. The business enterprises use consolidation tools to draft budgets for a specified period. This is enabled by using the scenario dimension available in most of the consolidation tools. The rules configured by analysts can be modified for a specified line item in a budget estimate. Such flexibility enables the finance team to better manage the budget drafting process. Some of the tools available in the market are Cognos Controller and Hyperion Financial Management. Sample screenshot of the Hyperion Financial Management Consolidation platform By implementing such solutions in a phased approach, companies are able to integrate data from disparate general ledgers, and produce a consolidated balance sheet and statement of operations. This results in improvement of the closing process and reduction of risks. Business enterprises would need to achieve closure of books, with the support of a powerful financial consolidation system, in order to reap the benefits of quick access to information. They would have more time for value-added analysis, improved control systems and quality, reduction in associated costs; strengthen investor relations and faster reporting /statutory compliance. Summary The financial consolidation, reporting and analysis applications provides the finance team speed, processing power, agility, and breadth of analysis needed to complete financial consolidation and reporting cycles faster. With the help of consolidation engines, the finance team can gain full process control and data transparency, allowing the team to simulate unlimited scenarios that address all of performance management reporting requirement. Hexaware Technologies. All rights reserved. 5

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