The first year a company has to consolidate, the finance team usually underestimates it by a factor of about four. The mental model is that consolidation means adding the subsidiaries to the parent and removing the bits that cancel out. That is the arithmetic. The arithmetic is not the work.
Here is what the work actually is.
Establishing what you bought, and when
If you acquired rather than incorporated, the first task is determining the acquired entity’s assets and liabilities at the date you obtained control, measured on your basis rather than theirs. Not at your year end. At the acquisition date.
That means someone reconstructs a balance sheet as at a random Tuesday in August, identifies the assets the acquired company never recognised, intangibles in particular, and arrives at a number for goodwill that is the residual of all of it. Doing this in January, from records kept by a team that has since partly left, is the single most expensive way to run a first consolidation.
Do it within weeks of completion, while the people who negotiated the deal still remember what was in it.
Uniform accounting policies
Group accounts have to be prepared on consistent policies. Your new subsidiary will have its own, and some of them will differ from yours in ways nobody flagged during diligence.
Depreciation rates. Revenue recognition cut-off. Capitalisation thresholds. Whether development costs were expensed or carried. Stock valuation and how overheads are absorbed. Each difference needs identifying, quantifying and adjusting on consolidation, and the adjustment has to be carried forward every year afterwards, which means it needs documenting now in a form the next person can follow.
This is the part most often discovered by the auditor rather than by the group.
Intercompany, which will not agree
It never agrees the first time. Goods in transit at the year end, management charges recorded by one side and not the other, loans translated at different rates, recharges that one entity treats as revenue and the other as a cost reduction.
Some of this is error and some of it is genuine. Both have to be resolved to zero, because an unexplained intercompany difference is a reconciling item in the consolidation that your auditor will not let through.
Fix the process rather than the number. Agree a cut-off that both ledgers work to, reconcile monthly, and have the two financial controllers sign the same schedule. A group that reconciles intercompany monthly spends an afternoon on it at year end. A group that does not spends three weeks.
Currency, if the subsidiary is overseas
Translation is mechanically straightforward and conceptually easy to get wrong. Balance sheet at closing rate, income statement at average, and the difference parks in a translation reserve in equity rather than going through profit.
What catches people is everything around it. Which entity’s functional currency is which, and on what basis you concluded that. How intercompany loans are classified, because a loan that forms part of the net investment is translated differently from one that does not. What happens to the reserve on disposal. These are judgements, and like all judgements they want writing down at the time rather than reconstructing later.
Minority interests, and the equity column generally
Where you own less than all of a subsidiary, the share you do not own has to be presented separately, in the balance sheet and in the results. It is not difficult but it is fiddly, and the consolidated equity reconciliation is where errors elsewhere surface. If equity does not reconcile, something above it is wrong.
Start in October, not January
The pattern is consistent. Groups that run a dry consolidation two or three months before the year end find the policy differences, the intercompany mess and the acquisition date questions while there is still time to deal with them properly. Groups that wait until the year end discover all the same things under deadline, with the auditor watching, and some of what could have been fixed becomes something that has to be disclosed instead.
A first consolidation is not hard, exactly. It is just considerably larger than it looks, and almost all of its difficulty is in the preparation rather than the arithmetic.