International Consolidation: Overcoming Global Financial Reporting Challenges

April 22, 2024

Global market expansion has led many companies to establish subsidiaries around the world. While this strategy opens new markets, it also complicates their financial consolidation process. Differences in legislation, currencies, and information systems pose several challenges. Fortunately, there are proven strategies for successfully navigating this transnational process.

The Key Challenges of International Consolidation

The goal of financial consolidation is to present a group’s financial statements as if it were a single entity. When a group spans multiple countries, this means gathering and standardizing information from multiple sources. International consolidation can be complex due to differences in accounting standards and tax regulations between countries.

For instance, Generally Accepted Accounting Principles (GAAP) in the U.S. may differ significantly from the International Financial Reporting Standards (IFRS) used in Europe and elsewhere. These differences can lead to variances in the presentation and interpretation of financial data, making consolidation more challenging.

In addition, fluctuating exchange rates can further complicate financial consolidation. Companies must convert transactions and balances in foreign currencies to their presentation currency at precise exchange rates, potentially resulting in foreign exchange gains or losses.

Managing cultural and language differences is another hurdle in international consolidation. Companies need to communicate effectively with their foreign subsidiaries and understand their local business and accounting practices. This requires in-depth knowledge of local languages and cultures, as well as international project management skills.

Finally, international consolidation requires robust technology to collect, standardize, and analyze financial data from different sources. Companies may need to invest in sophisticated financial information management systems to efficiently manage the consolidation process.

Different Legislation and Accounting Practices

Each country has its own accounting laws, with specific reporting requirements and valuation methods. Local financial statements need to be processed to comply with group standards and to produce consolidated financial statements that accurately reflect the overall financial position of the group. To do this, it’s important to understand the differences between local and group accounting standards.

For example, some countries may allow for accelerated depreciation of assets, while others may require fair value assessments. These differences can significantly impact the group’s balance sheet and income statement.

It’s also important to consider exchange rate differences. Foreign currency transactions must be converted to local currency using the exchange rate at the transaction date. Foreign exchange gains and losses must be accounted for appropriately.

Moreover, the consolidation process requires close coordination among the group’s various subsidiaries. Each subsidiary must provide its financial statements in a format that can be easily integrated into the group’s consolidated accounts.

Regular verification of compliance with the group’s accounting standards is essential. This may involve internal or external audits, as well as reviewing accounting procedures and internal controls. Errors or omissions can result in financial penalties and damage the group’s reputation.

Managing Multiple Currencies

When a multinational company conducts transactions in different currencies, exchange rate fluctuations can distort the analysis of its financial performance. Consolidation is the process of converting all data into a common currency. This step is  critical to the accurate assessment of a multinational’s financial performance,  and allows for a fair and accurate comparison of financial results from different international markets. Without this conversion, exchange rate  fluctuations can distort the interpretation of financial results, making it difficult to assess the company’s true performance.

For example, a U.S.-based company with significant sales in Europe could see its financial performance affected by the exchange rate fluctuation between the euro and the dollar. If the dollar appreciates against the euro, the company’s euro-denominated revenues might appear to decrease when converted to dollars, even if sales volume in Europe has remained stable.

To avoid these distortions, the company must consolidate its financial results by converting all figures into a single currency. By using a constant exchange rate for all transactions, the company can get a more accurate picture of its financial performance, regardless of exchange rate fluctuations. This practice is common among multinational companies and is typically performed during the preparation of annual financial statements.

Fragmented Information Systems

Subsidiaries often use separate accounting systems with heterogeneous data formats. Collecting and standardizing this information prior to consolidation is a significant task. Consolidating financial data from multiple subsidiaries is a complex task. Each subsidiary may have its accounting system, with specific data formats. These formats may vary based on the type of the business, geographic region, or local regulatory requirements.

The data collection process is often manual and requires many hours of work. Data must be extracted from each system, verified for accuracy, and then converted into a common format. This task can be prone to errors, especially if data is misinterpreted or incorrectly converted.

Once the data is collected and standardized, it must be consolidated. This tipically involves aggregating the data into a centralized system. This process can also be complex, as it requires a deep understanding of the data and its context.

However, technology solutions can help automate this process. These tools can extract data from different systems, convert it into a standard format, and automatically consolidate it. This can help reduce the time and effort required to consolidate and minimize potential errors.

Short Closing Deadlines

Despite these complexities, groups must publish their consolidated financial statements within  short timeframes in order to meet legal obligations and provide investors with a reliable picture of their performance. These tight deadlines require an intense work rhythm and perfect coordination between the different entities of the group. Each subsidiary must prepare  its own financial statements, which are then  consolidated at the group level. This consolidation requires adjustments to eliminate internal transactions and harmonize accounting practices.

To facilitate this process, many companies use specialized consolidation software. These tools allows you to collect data from each subsidiary, make the necessary adjustments, and produce consolidated financial statements. They also offer analysis and reporting features that are essential for understanding group performance and making informed decisions.

Despite the help of technology, consolidation remains a complex process that requires specific skills. Errors can have serious consequences, including legal compliance and investor trust. That’s why companies invest in training their teams and auditing their consolidation processes.

Moreover, consolidation must be carried out in an ever-evolving regulatory environment. International accounting standards are regularly updated, and companies must adapt to remain compliant. This may require changes in consolidation systems, accounting policies, or team training.

3 Key Strategies for Effective International Consolidation

Fortunately, these challenges can be overcome with some best practices. Here they are:

  • Implement a Single Accounting Framework

To ensure the consistency of financial information, the group must define  a single accounting method and framework that all entities must adhere to. This greatly streamlines the consolidation process. Harmonizing accounting methods and frameworks across all  entities of a group is essential to ensure the accuracy and reliability of financial data.

Indeed, adopting a single accounting framework eliminates the divergences that can occur when interpreting financial data. This not only facilitates the consolidation process but also the internal and external analysis of financial performance.

Furthermore, establishing unique accounting methods and frameworks helps prevent potential errors and fraud. It contributes to enhancing financial transparency and integrity, indispensable elements for maintaining investor and stakeholder trust.

Moreover, standardizing accounting practices can lead to increased operational efficiency. It can reduce the time and resources needed to prepare and verify financial information. It can also facilitate the training of accounting staff,  by eliminating the need to learn and understand multiple accounting systems.

Finally,  the adoption of unique accounting methodologies and frameworks can facilitate compliance with international financial reporting standards. This can be particularly advantageous for groups operating in multiple jurisdictions, as it can facilitate the comparability of financial information across borders.

  • Automate Data Collection and Processing

Automating the repetitive tasks of collecting, converting, and reviewing financial data saves precious time. It also reduces the risk of errors. Dedicated solutions make it easy to integrate data from various ERPs. Automation of financial processes increases operational efficiency. It eliminates tedious manual tasks , freeing up time for financial teams to focus on higher-value activities. This may include analyze data to make informed decision about the company’s financial strategy.

Automation also provides greater accuracy in data processing. It significantly reduces manual errors, often due to data entry or conversion of information. This ensures greater reliability of financial data, essential for strategic decision-making.

Automation also allows for better data integration.  Dedicated solutions make it easy to consolidate data from different ERPs. This provides a more accurate overall view of the company’s financial position. This data integration also facilitates regulatory compliance by ensuring the traceability and accuracy of financial information.

Finally, automating financial tasks promotes greater business agility. You can respond more quickly to market changes or business opportunities with faster and more efficient financial processes.

  • Oversee the Process from Start to Finish

Centralized management of the entire consolidation process is indispensable to coordinate the different entities and ensure they adhere to the group’s schedule and instructions. This management maintains a global vision and control over the various entities. It’s imperative to ensure that all entities follow the policies and adhere to the established schedule. This is particularly important in complex organizations with multiple operational entities, where coordination and alignment are necessary for the smooth running of the process.

Centralized management also facilitates the identification of potential problems and the implementation of solutions. For example, if an entity does not comply with the directives or schedule, centralized management can quickly identify the issue and take the necessary measures to resolve it. Moreover, this prevents delays and errors that could occur if each entity were left to its own devices.

Furthermore, centralized management ensures consistency in the consolidation process. This means that all entities follow the same procedures and use the same tools, eliminating variations and inconsistencies. This contributes to improving the efficiency and accuracy of the consolidation process.

In conclusion, centralized management facilitates communication between the different entities. This allows for efficient sharing of information and updates, which is essential for the success of the consolidation process.

Talentia Solutions for Your International Consolidation

Talentia CPM is a software suite dedicated to statutory and management consolidation, suitable for international groups.

Its strengths:

  • A single interface to centralize data from all subsidiaries
  • Automated processing (currency conversion, elimination of intercompany transactions…)
  • Dashboards to monitor the progress of the process
  • Compliance with international accounting standards
  • Rapid deployment in SaaS mode

With Talentia CPM, you get a consolidated view of your group’s financial performance in real time, to make the best strategic decisions.

Frequently Asked Questions

How to manage the heterogeneity of local chart of accounts?

Talentia CPM allows automatic mapping of local chart of accounts to a unique chart defined by the group.

Can Talentia CPM be connected to our existing ERPs?

Yes, Talentia CPM interfaces easily with all ERPs on the market to automate data collection.

How  does Talentia accelerate consolidation?

Numerous features automate tedious tasks: automatic data import, preconfigured consolidation wizards, intercompany detection… You save precious time!