What is Financial Consolidation? Definition & Guide

What is financial consolidation, and why is it crucial for businesses with multiple entities?

Simply put, financial consolidation is the process of combining financial data from multiple subsidiaries into one cohesive set of financial statements.

Consolidation isn’t just for large corporations; even smaller businesses with multiple locations or partnerships can benefit from streamlined reporting.

It’s about bringing everything together to see the full picture, providing clarity for both internal decision-makers and external stakeholders.

In this guide, we share how financial consolidation works, the steps involved, the benefits and the challenges you may face along the way.

We also explain how financial consolidation software can help simplify the process to save you valuable time.

The core concept of financial consolidation

The need for a clear and unified financial picture is essential. Without a financial consolidation, your financial data may become fragmented, making it difficult to assess overall performance and make informed decisions.

So, what is the financial consolidation process exactly – and what does it involve? Here, we provide a financial consolidation definition, explaining its purpose and key components.

What is the financial consolidation process?

Financial consolidation is the process of gathering, adjusting and combining financial and accounting data from multiple subsidiaries into a single set of reports.

This process is necessary to create financial statements that reflect the total operations of the parent company and its subsidiaries. It provides a unified, comprehensive and consistent view of financial information across the entire company.

It’s a method of financial reporting that’s not only used by large corporates with multiple subsidiaries, but also smaller businesses – for instance, a retailer with more than one store.

Components and entities involved

The financial consolidation process involves aggregating financial data from across a company into three main reports. Here, we explain the purpose of these consolidated financial statements:

• Income statement: Summarises the company’s revenues and expenses over a specific period, showing whether the business made a profit or incurred a loss.
• Balance sheet: Provides a snapshot of the company’s financial position at a particular moment, detailing its assets, liabilities and shareholders’ equity.
• Cash flow statement: Tracks the cash inflows and outflows over a period, showing the company’s liquidity and ability to generate cash.

The financial consolidation process can involve combining financial data from a range of entities over which the parent company has control. This includes:

• Subsidiaries: Fully owned or controlled entities whose financial information must be included in the consolidated financial statements.
• Associates: Entities in which the company holds significant influence but not full control. Their financial information is often included proportionally.
• Joint ventures: Businesses owned jointly with other parties, where the consolidation approach may vary based on the agreement.

What is financial consolidation?: Its purpose and objectives

The purpose of consolidated financial statements is to achieve three main objectives:

Streamlining financial information

Instead of managing and analysing separate financial statements from various entities, your business can combine all relevant data into a single set of reports.

This makes it easier to manage and interpret financial performance. The purpose of consolidated financial statements is to provide clarity, allowing your business to focus on strategic decision-making rather than dealing with fragmented financial data.

Achieving comprehensive insights

By consolidating financial information, your business gains a complete view of its financial performance across all entities. This helps management, shareholders and investors understand your company’s overall profitability, liquidity and financial health.

Without consolidation, financial insights would remain disjointed, making it difficult to gauge your company’s true financial standing.

Regulatory compliance

In Australia, financial consolidations are governed by the Australian Accounting Standards, particularly AASB 10 – Consolidated Financial Statements, which aligns with IFRS 10. This standard requires companies that control subsidiaries to consolidate their financial statements.

Meanwhile, the Corporations Act 2001 requires corporate groups classified as “reporting entities” to lodge consolidated financial statements with the Australian Securities and Investments Commission.

Financial consolidation methods and approaches

You may be wondering; what is the financial consolidation process? To answer that, let’s look at three financial consolidation methods used by businesses:

Full consolidation  

A full consolidation is the most comprehensive financial consolidation method. It’s used when a parent company holds a majority stake (more than 50 percent) in a subsidiary or has significant control.

With this method, the parent company fully incorporates the subsidiary’s financials into its own, including all assets, liabilities, revenues and expenses. This provides a complete financial picture of the parent company’s operations across all its entities.

Proportionate financial consolidation method  

This method has largely been replaced by the equity method of consolidation. It involves partially consolidating a subsidiary’s financials based on the parent company’s ownership percentage.

For instance, if a parent company holds 50 percent of a joint venture, it would consolidate 50 percent of the joint venture's financials.

Equity method of consolidation

This financial consolidation method is employed when a parent company has significant influence over, but not full control of, a subsidiary.

This is typically when the parent holds between 20 to 50 percent of the company’s shares. Instead of fully consolidating financials, the parent records its share of the subsidiary’s equity as an investment.

The parent’s share of the subsidiary’s profits or losses is then reported on the parent company’s income statement, reflecting the investment's performance without fully merging the financials.

What is the financial consolidation process?

Below is a streamlined five-step guide outlining financial consolidation best practices and the process for performing a full consolidation:

1. Align reporting schedules and accounting policies

To enable a smooth consolidation, ensure all subsidiaries report their financials for the same period, whether monthly, quarterly or annually. Synchronising these timelines avoids discrepancies and delays.

It’s also wise to standardise accounting policies across the company to ensure consistency in revenue recognition, depreciation and valuation methods.

2. Collect and standardise financial data

Gather financial statements from all subsidiaries, including balance sheets, income statements and cash flow statements. Ensure this data is standardised according to the consolidation policy established in step one.

3. Eliminate intercompany transactions

To prevent double-counting, eliminate all intercompany transactions and balances from the consolidated financial statements. This includes sales, loans and other transactions between subsidiaries, as well as any resulting profits.

This step ensures the consolidated financial statements only reflect transactions with external parties.

4. Adjust for non-controlling interests

For subsidiaries where the parent company does not own 100 percent of the equity, you’ll need to calculate the non-controlling interest.

This step ensures the financial statements accurately reflect the portion of equity not owned by the parent company, providing a true picture of each entity’s contribution.

5. Consolidate financial statements

With the above adjustments made, the next step is to combine the financial data into a consolidated balance sheet, income statement and cash flow statement.

As financial consolidation often requires sourcing data from a range of systems, an automated software solution can help make the process far quicker and easier. It can also help you avoid a considerable amount of time-sapping, often error-prone data entry.  

Impact on financial reporting and analysis

By now, you should hopefully have sufficient understanding to answer the question: what is a financial consolidation? Let’s recap the main benefits of consolidations and consider the common challenges involved.

5 benefits of financial consolidation

The purpose of consolidated financial statements is to help you:

• Make better strategic decisions by providing a clear, unified view of a company’s overall financial performance.
• Ensure a true and fair representation of the company’s financial position by aggregating data and eliminating intercompany transactions.
• Build trust with external stakeholders, including investors and regulators, by demonstrating consistent and transparent financial management.
• Ensure compliance with accounting standards such as AASB 10 and IFRS 10.
• Streamline reporting processes, saving time and reducing the complexity of financial analysis and audits.

Risks and challenges

Despite its benefits, financial consolidation comes with challenges. Many of these stem from the need to collect and reconcile financial data from a range of sources and systems. Common challenges include:

• Data quality issues due to manual entry and outdated processes that lead to inaccurate reports.
• Reconciliation tasks, such as eliminating intercompany transactions, are time-consuming and delay financial closing.
• A lack of automated financial consolidation results in inefficient processes and increased risk of errors.
• Disjointed workflows and poor collaboration across teams create inconsistencies in financial data.
• Manual processes increase the risk of data manipulation and fraud without proper audit trails.
• Complex intercompany transactions add layers of difficulty and require careful reconciliation.
• For large multinational companies, managing the consolidation process across various jurisdictions with different currencies and regulations can be daunting.

Technology's influence on financial consolidation

Cloud-based financial analysis platforms like Fathom offer a way to achieve automated financial consolidation, helping you avoid or solve the aforementioned challenges. Here’s how Fathom can help:

• Reduces time spent on consolidations with accurate results delivered in minutes, saving you an average of 14 hours per reporting cycle.
• Minimises risk of error by eliminating manual processes, leading to more accurate consolidations than traditional spreadsheets.
• Simplifies global operations with support for over 97 currencies and integration with platforms like Xero, QuickBooks and Excel.
• Stays connected to source accounting systems, enabling automated financial consolidation.
• Provides intercompany eliminations for a clearer view of a company’s true financial position.
• Custom reports bring together results from multiple entities, with the ability to consolidate budgets and create variance reports.
• Scales to support up to 300 entities in a single group, offering flexibility for businesses of all sizes.
• Intuitive interface simplifies consolidations, allowing even junior team members to confidently manage the process.
• Offers dedicated customer support and training, helping you maximise the platform and resolve issues quickly.

If you would like to learn more about Fathom and see it in action, you can view the webinar below.

What is financial consolidation?: Recap of key points

Financial consolidation is a crucial process for businesses managing multiple entities. By integrating financial data across subsidiaries, associates or joint ventures, companies gain a unified view of their financial position, which is vital for informed decision-making and regulatory compliance.

Here’s a recap of the key points of this guide:

• Financial consolidation is essential for businesses operating through multiple entities to achieve accurate, holistic financial reporting.
• The process involves aggregating financial data from subsidiaries, associates and joint ventures into a single set of financial statements.
• Financial consolidation methods include full consolidation, proportionate consolidation and the equity method, which are used depending on the level of control a parent company holds over its entities.
• Financial consolidation best practices involve aligning reporting schedules, collecting financial data, eliminating intercompany transactions, adjusting for non-controlling interests, and creating consolidated financial statements.

Main impacts of financial consolidation

• Streamlined reporting allows for comprehensive insights into overall business performance, enabling better strategic decisions.
• Consolidation ensures accurate financial insights, improves compliance and builds trust with stakeholders.
• Automated financial consolidation software helps save considerable time, lowers the risk of errors and simplifies the process with multi-currency support.

Simplify your financial consolidation process with Fathom

Try this innovative financial analysis solution free for 14 days to see how it can help you save considerable time and effort.

Fathom provides powerful tools that automate manual consolidation processes, eliminate intercompany transactions and deliver insightful reports – all in one intuitive platform.

Whether you’re managing multiple entities or complex structures, Fathom makes it easier to gain a clear view of your financial performance.

If you would like to learn more about Fathom prior to starting our credit-card free trial, you can read all about its benefits on our website.