Control Instrument or Mandatory Task?

August 9, 2006 by admin

The term “group consolidation” describes the reality. Group consolidation displays an enterprise and all its subsidiaries and investments as a consolidated unit. This consolidated financial statement for a corporate group is becoming ever more important. For a long time, group consolidation was regarded as a mandatory task – a legal financial statement – in the context of legal requirements or tax regulations. Today, however, it is increasingly becoming an instrument of enterprise control or as a provider of management information – as a management or controlling financial statement. This shift is why more and more companies are deciding to implement a uniform consolidation solution. These companies find that their existing solutions can’t meet the increasing legal demands on internal and external reporting. And uniform, enterprise-wide reporting has become an important element of an IT strategy.

Integration of Management and Legal Financial Statements

Matrix Consolidation with SAP SEM

Matrix Consolidation with SAP SEM

It used to be easy to assign the legal units of a corporate group – like production or sales companies – to a specific area of the enterprise. But today, newly created, newly acquired, or newly founded units increasingly belong to several areas of an enterprise: a matrix organization. Accordingly, the question of the integration of management and legal consolidation is closely linked to this matrix organization.
More and more often, the requirements of legal consolidation also affect areas that used to be covered by group controlling and management consolidation. Such areas include segment reporting or the capture of enterprise values with the new rules for goodwill balancing according to International Financial Reporting Standards (IFRS) 3.1. For this reason, thoughts turn to producing the various financial statements in one integrated process.

SAP SEM: More Flexibility Requires More Planning

SAP SEM: More Flexibility Requires More Planning

The implementation of a completely integrated consolidation process with management and legal financial statements has an enormous influence on the planning of a group consolidation project. The decision also affects the future day-to-day work of the departments that make up a group’s headquarters. For example, management consolidation is often understood as a task of controlling, so it is performed by that department. Legal consolation, however, resides in accounting. It might therefore make sense to combine both departments organizationally during a complete integration of both financial statement processes. But doing so demands exact planning.

Releases of SAP SEM

Releases of SAP SEM

In addition to these kinds of organizational questions, a company must also examine data logistics: the transfer of information from decentralized reporting units to the group’s headquarters. Are these units capable of storing information for the legal financial statement and the management view in one set of data? Do the units have the information they require? Can the units transmit the information more or less simultaneously to the group’s headquarters so that preparation of an integrated financial statement is not delayed?

Decentralized or Centralized Consolidation Process?

The design of the consolidation process is just as important in terms of the distribution of tasks in the corporate group. In heterogeneous group landscapes, many individual departments are often responsible for consolidating an enterprise area. With this approach, several decentralized consolidation processes flow into a new central process.
The advantage here is that responsibilities are clearly delimited and that, in some cases, each partial group consolidation covers specific requirements without influencing the overall process – processing additional management information with sales channels or products. Only the necessary information required by the central office is passed on.
A disadvantage of this approach is found in the interfaces for transmitting the information to the group’s headquarters. The interfaces are additional sources of errors and create a need for additional effort because of their implementation and maintenance. And to some extent, consolidation does not offer complete transparency into the entire process and all processing steps. After all, the reporting units pass only aggregated results along, which makes it more difficult to correct and understand the group’s results.
All reporting units, however, are directly involved in a uniform, groupwide consolidation process. The interface problem no longer exists, and transparency is guaranteed. But the design of a uniform process must also consider the many-sided requirements of the decentralized units. The danger exists of developing a very complex process, which would increase process costs due to the operating, training, and maintenance effort involved.
In both cases, the success of consolidation rises and falls with the availability and quality of the data. A company should clarify the important issue of data capture before it implements a consolidation solution. Ideally, the effects on performance should be evaluated when requirements are defined. Doing so allows for early intervention when complex requirements – usually from management consolidation – must be mapped.

Paths to Consolidation

In principle, consolidation solutions can be implemented using three different approaches. In the traditional waterfall approach, the listing and analysis of requirements is followed by the business blueprint, realization, testing, preparation for production, and, finally, the start of production. The disadvantage with this approach is that users usually deal with the solution to any significant degree only after the start of production – too late for knowledge transfer and the correction of any problems.
Departmental requirements tend to drive the second approach. When reconstructing group financial statements based on legacy data that has been transferred, the figures for comparing the previous period and the previous year should be transferred to reporting. The employees involved are forced to work productively with the new solution very early on. A preconfigured prototype offers only the functions relevant to the historical period. The remaining functions are switched on during implementation.
The third approach is especially appropriate for realizing several decentralized consolidation processes. The initial step sets up a consolidation template that functions as a model for the systems of each subgroup. The subgroups maintain the template according to their own specific requirements, without changing the interfaces or the basic requirements of the parent group. The effort required at the central office is limited with this approach, but the success of the project largely depends on the decentralized units and communication with them.
Most companies use the traditional waterfall approach, but the second approach is recommended if the legacy data is present in the appropriate quality during the implementation – during a release upgrade, for example. The third approach is best when the IT strategy of the corporate group allows the subgroups to realize individual requirements during the implementation and thus create added value for themselves.

Wolfgang Schütte-Felsche

Wolfgang Schütte-Felsche

Michael Gardumi

Michael Gardumi

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