What are the differences in Financial Consolidation for Accounting and Finance?

July 28, 2023

Financial consolidation is a process by which a company combines its financial statements from several entities to create a unified financial picture. However, within the finance and accounting departments, different approaches and methodologies are used to consolidate financial statements. This article is to provide a description and examples of the differences between financial consolidation as used by finance compared to financial consolidation as used by accounting.

In finance, the focus is on the financial performance of a company as a whole, including its debt and equity financing. Finance consolidation involves creating a single set of financial statements for the entire company, including all of its subsidiaries. The financial statements are then broken down into segments, which may include business units, product lines, or geographic regions. The purpose of finance consolidation is to allow investors and stakeholders to evaluate the performance of the company as a whole, rather than individual subsidiaries.

On the other hand, in accounting, the focus is on reporting the financial results of each entity within the organization. The accounting consolidation process involves consolidating the financial statements of parent and subsidiary companies. Accounting consolidation requires that the parent company's financial statements incorporate the financial statements of all its subsidiaries. The subsidiary financial statements are adjusted to eliminate intercompany transactions and balances. This ensures that the resulting consolidated financial statements accurately reflect the financial results of the parent company and its subsidiaries.

For instance, suppose a company has three subsidiaries involved in different businesses, like manufacturing, trading, and service. In finance consolidation, the parent company consolidates all three subsidiaries' financial statements by adding them together on a line-by-line basis. Whereas, in accounting consolidation, the parent company adds the subsidiaries' financial statements on a line-by-line basis with adjustments made for intercompany transactions. The adjustments lead to the elimination of profit and loss and balance sheet items that are due to intra-group transactions.

To wrap it up, financial consolidation, as used by finance, focuses on producing a single set of financial statements for the whole company to give investors an overview of the organization's financial performance. Accounting consolidation, on the other hand, focuses on the combination of financial statements of all subsidiaries with adjustments for the elimination of intercompany transactions to produce an accurate representation of the parent company's financial results.