Some guidelines for preparing consolidated financial statements. Discussion centers on recognizing and eliminating inter-company balances on both the balance sheet and the income statement, then utilizing Excel or Microsoft FRx to eliminate them.
Items you will need
- Ability to export financial data from your accounting system into a spreadsheet, OR
- Microsoft FRx
First, you need to establish a system by which you track intercompany balances. An easy way to do so is to keep balance sheet amounts in specialized clearing accounts. For instance, company A owes company B $10,000; both companies are related parties. Company A would have a clearing balance of ($10,000) and company B would have a balance of $10,000. On a consolidation, these balances are easily pinpointed and eliminated.
Income statement amounts (intercompany revenue and costs) can be a bit more complicated. These should be eliminated even if they make sense (for instance, a real estate holdings entity charging the main company contracted amounts for rent) as they have no impact on the consolidated picture. Leaving the intercompany revenue on the P&L will distort all ratio analysis involving sales and gross margin, and can skew both revenue and budget projections.
The best solution to eliminating intercompany P&L items for consolidation is to identify each type of transaction that generates them. In this case, let's say that company A charges company B rent and company B charges company A management fees. To consolidate rents, debit company A's rent income and credit company B's rent expense. To consolidate management fees, debit company B's management fee income and credit company A's management fee expense.
Depending on the size and complexity of the entities you are consolidating, you may be able to do most of this in a spreadsheet. If this is the case and you are only consolidating two companies, we recommend setting up four worksheets in a workbook to receive imported data (tweak your export process to include zero balance rows). Then, set up two worksheets to combine data from the first four. Set these up with a consolidation adjustment column, and then manually eliminate balances.
It will help if you set your financial system up to segregate and group intercompany balances. For instance, company A's clearing account could be "1155" and company B's could be "1156," or they could even be the same number if this does not go against your chart of accounts structure.
For larger businesses that require more complex consolidations, you may consider acquiring some specialized software. Microsoft FRx is a very powerful tool that can serve as a bridge between multiple accounting systems. You can use it to generate on demand any conceivable financial statement, as well as any account detail and transaction report. Most importantly, FRx can pull data from multiple entities and manipulate it prior to output in order to automatically eliminate inter-company balances, giving you consolidated financial statements on demand. Furthermore, all reports can be saved in a file format that permits drill-down, thereby enabling the recipient to enlighten themselves on any questionable balance without having to request additional reports.
We are experts with this software, and can assist your company with implementation. We also offer roaming CFO services as well as MAS90, MAS200 and QuickBooks consulting. We operate on a national level and can come to you or resolve your issues remotely. Please visit our FRx page for more information.