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Consolidated Account System 1. Definition Consolidated account system & the conc ept of Group company-accounts.

. A group of companies is required to prepare accou nts for the group as a whole as well as the company. These consolidated accounts are almost always what matter to Top management or investors. The consolidated accounts are also called group accounts. The consolidated P & L includes the pro fits of subsidiaries and the company's share of profits made by associates and j oint ventures. The consolidated balance sheet similarly shows the amounts of ass ets and liabilities of the company and all its subsidiaries Accounting for Multi ple Companies with a Single Set of Books In some cases only one set of books can be used to maintain multiple companies as long as the companies share the same account structure, accounting calendar, and functional currency. Summary account s that maintain consolidated balances can be created for faster reporting and on line inquiry. For example, you can see consolidated cash balances, or non-exempt salaries across all companies, and so on. A single set of books for multiple co mpanies: 1. 2. Account structure, accounting calendar, functional currency, and set of books, will be defined A separate company can be created for our eliminat ing entries. Where elimination entries can be posted to this elimination company without needing to reverse them later. A parent company can be created that tha t includes all the other companies which we want to consolidate including the el iminating entry company as children. For example, if you want to consolidate com panies 01 through 07 and your eliminating entries are made to company 08, define a parent company 09 whose children are companies 01 through 08. 3. To enter multi-company transactions: o o o o o o Enter intercompany journals. Set of books should be defined to have General Ledg er compensate all intercompany journal entries automatically, General Ledger sho uld record balancing entries to the appropriate intercompany accounts for each c ompany. Automatic eliminating entries can also be provided, where we can define automatic entries to eliminate intercompany receivables and payables, investment s in subsidiaries, intercompany sales, and so on. To expedite consolidations and enhance consolidation reporting, a separate company should be defined for elimi nating entries. eliminating entries can be posted to this elimination company wi thout needing to reverse them later. Financial statements that clearly identify consolidating and eliminating amounts should be prepared, making it easy to reco ncile consolidated balances. Eliminating entries company should also be a child of the parent company 1

To define automatic eliminating entries: o Recurring journal formulas that calculate the amounts for your consolidating and eliminating entries by using the accounts in your consolidating companies as fo rmula factors can be created. For example, define amounts for a journal entry li ne affecting your investment in subsidiary account by summing your subsidiary eq uity accounts in your formula calculations. Creating Consolidated Reports: Reporting and inquiring on consolidated balances can be done in the same way we do with any other balances. A consolidating repor t might show your report line items down the left side, and then present each su bsidiary and your consolidated totals in separate columns: U.S. Operations Cash Investments Receivables Fixed Assets .... .... $ 1,250,000 2,725,000 4,523,795 2 4,354,253 .... .... U.K. Japan Operations Operations $ 750,253 1,152,750 885,952 2,425,253 .... .... Eliminating Consolidated Entries Total $ 3,345,506 4,383,57 8 7,033,000 34,077,806 .... .... 149,341,874 $ 1,345,253 856,253 1,648,253 8,152,425 .... .... 350,425 $ 25,000 854,125 .... .... 1,758,665 Retained Earnings 115,895,452 12,752,200 22,452,887 To create a consolidating Report: 1. Balance sheet row should be defined with ro ws to include rows for intercompany receivables and payables, investments in sub sidiaries, and intercompany amounts. 2. A column set that has separate columns f or each company should be created. If we enter our eliminating entries in a sepa rate company, we have to define a column for that company. 3. Define a total con solidated column by summing up all the columns for each of companies, including the eliminating company. 4. Run the consolidating report with the consolidating row and column sets. Note that to get a consolidating income statement report, y ou can simply define a consolidating income statement row set and run it with th e same consolidating column set. Accounting for Multiple Companies with Multiple Sets of Books If our companies have different account structures, accounting ca lendars, or functional currencies, we need to create a set of books for each com pany. Account structure, calendar, and functional currency we want to use for ea ch set of books should be defined. Set of books for each subsidiary company, as well as for the parent company should be defined. Provisions to create consolida ted reports should be allowed only in parent set of books. Multiple Reporting Cu rrencies (MRC) feature can be given for every company so every company can use t heir parent company's functional currency as the reporting currency for the repo rting set of books. 2

Intercompany Transactions A centralized transaction approval feature can be give n in GL for intercompany transactions. That can help manage intercompany transac tions through a centralized process. With this parent and subsidiaries can send intercompany transactions to one another for review and approval, before the tra nsactions are posted in each company's set of books. It can be given as an optio n. If it is enabled all intercompany transactions should be centralized. Or else it will be a decentralized approach where each subsidiary enters intercompany t ransactions autonomously; In this case, each subsidiary enters intercompany tran sactions directly into their set of books. In the second case separate transacti ons will be entered in each subsidiary set of books to reflect each subsidiary's portion of a multi-company transaction. For each subsidiary Enter the subsidiar y's portion of the multi-company transaction, making sure to balance the entry a gainst an intercompany account. For example, to record a cash sale from Company A to Company B (subsidiaries of the same parent), we might make the following en tries: Company A's set of books: Cash................... 25,000 Intercompany Sal es........... 25,000 Company B's set of books: Intercompany Purchases... 25,000 Cash................. ......... 25,000 The intercompany accounts should be eliminated during the conso lidation process. Consolidation Methods To consolidate multiple companies whose accounting information is maintained in separate sets of books a Global Consolid ation System should be provided with General Ledger. 3

Overview of Multi-Currency Accounting Multiple Reporting Currencies To report on account balances or at the transactio ns level in multiple currencies, a primary set of books using functional currenc y and additional sets of books using reporting currencies should be defined. Pro vision to define Primary and secondary or reporting set of books should be given To specify our set of books as primary or reporting we should provide the follo wing options Primary Set of Books: Choose this option if you are defining a prim ary set of books. Reporting Set of Books: Choose this option if you are defining a reporting set of books. Not Applicable: Choose this option if you are not usi ng Multiple Reporting Currencies. Defining Intercompany Accounts To balance intercompany journals for our set of b ooks, provision to define intercompany accounts for specific sources and categor ies should be given. When you define your set of books, you assign a default int ercompany account. You can define intercompany accounts in addition to the defau lt intercompany account for your set of books. General Ledger posts a balancing amount to this account when there is no intercompany account defined with a matc hing source, category, and type. 4

Specify the Source and Category that applies to the intercompany account we are defining. The default intercompany account specified when defining your set of b ooks should appears with the source and category. Others for both debits and cre dits. You can define additional intercompany accounts using Other for either the source or the category, but not both. Enter the Type of balancing entry (Debit or Credit) for which you want to define an additional intercompany account. If y ou want both debit and credit amounts to be posted to the same additional interc ompany account, you must enter the intercompany account on two lines, one for ea ch type. Enter the Account against which the balancing amount should be posted. You can assign multiple unique combinations of source, category, and debit/credi t to a single account. General Ledger automatically creates an intercompany acco unt for each balancing segment value. For example, if you want to create additio nal intercompany accounts for the five companies in your chart of accounts, defi ne accounts for only one company segment value. General Ledger uses the account you enter for one company as a template for the remaining four companies. When y ou post intercompany journals against any of the other four companies, General L edger automatically substitutes the appropriate company segment value in your te mplate. Need for such a system Most major corporations comprise numerous compani es bought along the way to create their empires. The financial statement reflect s the financial results for all the entities it bought as well as the original a ssets of the company. Because the parent company now fully controls the subsidia ry, by accounting rules, the parent company must present its subsidiary's and it s own financial operations in a consolidated manner (even though the two compani es may be separate legal entities). The parent company does so by publishing a c onsolidated financial statement, which combines the assets, liabilities, revenue , and expenses of the parent company as well as those of its affiliates (that is , its subsidiaries, associates, and joint ventures). In preparing consolidated f inancial statements, the parent company must eliminate numerous transactions amo ng the parent and its affiliates before presenting the consolidated financial st atements to the public. For example, the parent company must eliminate transacti ons among the parent and its affiliates for accounts receivable and accounts pay able to avoid counting revenue twice and giving the financial report reader the impression that the consolidated entity has more profits or owes more money than it actually does. Other key transactions that a parent company must eliminate w hen preparing consolidated financial statements are

Investments in the subsidiary: The parent company's books show its investments i n a subsidiary as an asset account. The subsidiary's books show the stock that t he parent company holds as shareholders' equity. Rather than double-counting thi s type of transaction, the parent company eliminates it on the consolidated stat ements by writing off one transaction.

Interest revenue and expenses: Sometimes a parent company loans money to a subsi diary or a subsidiary loans money to a parent company; in these business transac tions, one company may charge the other one interest on the loan. On the consoli dated statements, any interest revenue or expenses that these loans generate mus t be eliminated.

Advances to subsidiary: If a parent company advances money to a subsidiary or a subsidiary advances money to its parent company, both entities carry the opposit e side of this transaction on their books (that is, one entity gains money while the other one loses it, or vice versa). Again, companies avoid the double trans action on the consolidated statements by getting rid of one transaction.

Dividend revenue or expenses: If a subsidiary declares a dividend, the parent co mpany receives some of these dividends as revenue from the subsidiary. Any time a parent company records revenue from its subsidiaries on its books, the parent company must eliminate any dividend expenses that the subsidiary recorded on its books.

Management fees: Sometimes a subsidiary pays its parent company a management fee for the administrative services it provides. These fees are recorded as revenue on the parent company's books and as expenses on the subsidiary's books.

Sales and purchases: Parent companies frequently buy products or materials from their subsidiaries, or their subsidiaries buy products or materials from them. I n fact, most companies that buy other companies do so within the same industry a s a means of getting control of a product line, a customer base, or some other a spect of that company's operations. However, the consolidated income statements shouldn't show these sales as revenu e and shouldn't show the purchases as expenses. Otherwise, the company would be double-counting the transaction. Accounting rules require that parent companies eliminate these types of transactions. COMBINED AND CONSOLIDATED FINANCIAL REPOR TING Larger organizations with diverse accounting operations often face signific ant issues in designing a general ledger accounting environment to meet their ne eds for combining and consolidating financial information. Such businesses are t ypically faced with complicating situations, such as Different legal business en tities, each set up as a separate accounting company on the general ledger syste m. One organizational unit selling to another. Foreign operating units running t heir own general ledger systems. Complex environments such as this have some uni que needs that must be met for combining or consolidating financial activity at the corporate level. To satisfy these needs, the organization's corporate accoun ting department should have available a special set of general ledger system fea tures for financial combination and consolidation. People often confuse combined financial reports with consolidated financial reports. Both environments use mu ltiple accounting companies. The key difference is that combined financial repor ting usually involves a straight combination of underlying accounting records. S ometimes this includes eliminating interorganizational activity, such as sales. Consolidation, on the other hand, is inherently more complex and includes the el imination of a parent company's investment in one or more subsidiaries. Overall, the requirements for either combined or consolidated financial reporting entail Producing a single set of financial records from the financial records of two o r more different accounting companies. Eliminating intercompany activity between business units. Producing an appropriate audit trail reflecting this. From an a ccounting perspective, financial consolidation refers to a process for preparing a single set of financial records that reflects all corporate holdings consolida ting financial ledgers from any branches, departments, or subsidiaries; that use their own accounting ledger (i.e., accounting company). But by its nature, this process is driven by both accounting and financial principles and by internal m anagement reporting needs. Thus, to be efficient, many organizations have one pr ocess in place for collecting accounting information from other business units. This process serves both period end management reporting needs and financial con solidation requirements. Financial consolidation can occur annually or more freq uently, as required for interim consolidated financial reporting. INTERCOMPANY A CCOUNTING AND ELIMINATIONS Intercompany accounting involves accounting for trans actions between business units that use separate accounting ledgers. Each busine ss unit has accounts that isolate intercompany activity from routine business tr

ansactions with the outside. 6

For example, if Plant A receives $1,000 of product shipped from Plant B at cost, Plant A will account for it by crediting a special intercompany payable account : DR Plant A Inventory $1,000 CR Intercompany Accounts Payable $1,000 Plant B wi ll account for its reduction in inventory using a similar intercompany receivabl es account: DR DR CR CR Intercompany Accounts Receivable $1,000 Intercompany Cos t of Goods Sold 1,000 Inventory $1,000 Intercompany Sales 1,000 The parent company's accounting records would be misstated if the Intercompany A ccounts Payable and Intercompany Accounts Receivable accounts from this example were added to the outside accounts payable and receivable and reported as combin ed total accounts payable and receivable (respectively), both would be overstate d by $1,000. Elimination entries must restate a parent company's financial posit ion to remove the inter-company effect of sales between different business units . Eliminations become particularly complex when consolidating the accounts to e liminate the parent company's holdings in a subsidiary. Businesses typically rep ort eliminations using the format shown in Figure 12-11. This traditional format is helpful in elucidating the combination or consolidation process: it shows al l accounting companies, the elimination entries and the final combined or consol idated result for each account in the chart of accounts. This format is generall y referred to as a combining or consolidating report. 7

12.5 ALTERNATIVE APPROACHES FOR CONSOLIDATED FINANCIAL REPORTING Within the set of features and capabilities available in a modern general ledger system, three basic approaches may be used for combining or consolidating financial informatio n: Replacement consolidation. Consolidation using financial reporting capabiliti es. Consolidation on a spreadsheet. These approaches use different techniques to map account information from different subsidiary ledgers into a single line of combined or consolidated information. The manner in which this mapping occurs i s a key difference between each of these approaches. These approaches are used f or reporting either consolidations or combinations. REPLACEMENT CONSOLIDATION A popular and straightforward approach for financial consolidation involves the us e of a consolidated accounting company to receive and store consolidated account balances from other subsidiary accounting companies. Overall, this approach of replacement consolidation offers the distinct advantage of allowing consolidated account balances to be retained on the general ledger master file. This provide s a host of benefits, including 8

The use of financial reporting structures and other financial reporting capabili ties associated with general ledger master file accounts. The use of journal ent ry templates for creating elimination and other closing journal entries in the c onsolidating accounting company. A period-to-period record of consolidated accou nt balances available for inquiry and reporting. Basic Approach. Under the conce pt of replacement consolidation, empty account balances in this consolidated acc ounting company are replaced by cumulative balances from those of subsidiary acc ounting companies, as shown here. Subsidiaries Company 10 10 20 30 30 Accounts 1 100 Cash 1110 CDs 1100 Cash 1100 Cash 1110 CDs $3,400 19,000 7,000 11,500 29,200 Company 99 Consolidated Accounts 1100 Cash $70,100 Indeed, different systems have different implementations of this approach. For e xample, some general ledger systems implement replacement consolidation by stori ng the parent company's account number in each of the subsidiary account's recor d on the general ledger master file. Thus, using the previous example, the Compa ny 10 account, 1100 Cash, will retain information indicating that it consolidate s into the account Company 99, 1100 Cash, in the parent company. Another approac h involves an external specification that lists the accounts (and respective acc ounting companies) mapping into each consolidated account. Again using the previ ous example, the system would store tabular information associating the five sub sidiary accounts with the 1100 Cash consolidated account. This tabular approach provides a straightforward audit trail of the consolidation process, although an y system using the first approach should do this as well. Generally, no signific ant advantages or disadvantages distinguish one approach over the other. With re placement consolidation, the system must enforce a restriction on those account balances in the consolidated accounting company that are updated via replacement . Like summary accounts in the chart of accounts, the balances of these accounts may be updated, that is, replaced, only through the defined account mapping. Th ey cannot be updated by using journal entries. This is necessary to accommodate multiple replacement runs, should the accounting department decide to rerun the replacement consolidation process a second time. Except for this difference, the consolidating company has all the features and attributes of any other general ledger accounting company. In fact, it may contain other posting accounts that c an be updated via journal entry, such as for overhead expenses, retained earning s, and corporate debt. These are accounts that would typically not exist in any other business unit's accounting ledger. (If isolating these corporate accounts is desirable, an alternative is to set up a separate accounting company to hold them.) A Refinement Using Identical Accounts. Note that the mapping shown in the previous example allows dissimilar account numbers to be mapped into a particul ar account in the consolidated accounting company. Some general ledger systems f orego this flexibility for a much simpler approach to tie subsidiary and parent accounts together. This refinement requires maintaining consistent account numbe rs among the different accounting companies and allows the consolidation to flow from accounts in one company, to identical account numbers in another company. A key advantage to this approach is that the mapping of accounts can be defined on a company rather than an account level. This avoids the need to specify a map ping or relationship between individual accounts and, instead, allows this relat ionship to exist on an accounting company level. 9

There is one slight disadvantage to this approach; it may require creating detai led accounts in the consolidated accounting company that would not otherwise be necessary. To illustrate this using the previous example, the consolidated accou nting company (Company 99) would require an account set up to receive the balanc es from the accounts, 1110 CDs, even though there is no reporting requirement fo r this information within Company 99: Subsidiaries Company 10 10 20 30 30 Accoun ts 1100 Cash 1110 CDs 1100 Cash 1100 Cash 1110 CDs $3,400 19,000 7,000 11,500 29 ,200 Company 99 99 Consolidated Accounts 1100 Cash 1110 CDs $21,900 48,200 Nevertheless, organizations that use identical account numbering for all separat e business units can benefit from this approach. 10