The benefits of investing in consolidation software in times of change

By Tom Hagenaars, Partner - Digital Transformation,
Verena Glutting, Director - Capital Markets and Accounting Advisory and
Steven Zikeli, Senior Manager - Capital Markets and Accounting Advisory

Business shifts accelerate the need for technology

Companies undergoing transformative business/market changes must constantly be reevaluating their existing systems and processes. This includes their overall Enterprise Resource Planning (“ERP”) and close/consolidation system landscape. 

We are seeing several types of business changes that are triggering companies to implement new technologies that will automate the close and consolidation accounting processes. Financial consolidation systems allow companies to report on consolidated financial statements and internal reports by “sitting on top” of the ERP layer. 

However, technology alone is not enough. Having trusted advisors with expertise in accounting, financial reporting, ESG reporting, tax, and technology is also crucial to drive implementation success. This ensures that the investment in technology leads to realized value creation at the company. 

Our team of capital markets and accounting advisory professionals have helped companies face these business changes head-on through the implementation of consolidation systems:

Global expansion

As companies grow and enter new international markets, there are increased statutory reporting requirements under several bases of accounting. Each country may have separate reporting requirements that are different from the consolidated financials. Consolidation systems can help to address these by allowing for several sets of books and records to be maintained, with “Stat-to-GAAP” adjustments booked in consolidation.

This is becoming increasingly important with the formal adoption of the Minimum Tax Directive by EU member states. A group of over 140 countries agreed to a framework under Pillar Two, which introduces a minimum Effective Tax Rate (ETR) on profits attributable to each jurisdiction in which a company operates. While imposing a minimum tax on companies is not new, Pillar Two will require companies to disaggregate their financial income into individual tax units and legal entities. Balances and transactions that are maintained in separate topside ledgers and not reflected in the local ledgers may need to be pushed down and aggregated with the local ledgers to reflect legal entity level reporting that meets the requirements of the Pillar Two regime.

Finally, organizations with global operations must address several other complex accounting issues. For example, consolidation systems standardize and automate intercompany eliminations, which can be extremely complex when manually dealing with multiple ERP systems. With the use of system logic, consolidation systems can streamline this process and produce financial results after intercompany eliminations at multiple levels of a company’s complex legal structure. Currency translations are also seamlessly addressed across jurisdictions before group reporting. 

Inorganic growth

Growth achieved through acquisitions often results in several different ERP instances that must be manually aggregated and harmonized before financial reporting can take place. Consolidation systems represent a cost-effective way to aggregate disparate systems and automate many of the manual processes that must be done today. They utilize mapping tools that give companies flexibility to handle several subsidiaries on different charts of account structures. This leads to the ability to produce consolidated results quickly and efficiently, allowing more time for strategic insight.

Acquisitions also present unique accounting and reporting complexities that must be addressed. Purchase accounting will require companies to record the acquired assets and assumed liabilities at fair value, with goodwill recognized. How, and where, those purchase price adjustments (“PPAs”) are recorded in the books and records varies depending on the needs of the organization and their applicable accounting framework. Typically, PPAs are booked in the acquiree’s ledger in its functional currency. Goodwill is sometimes maintained at the parent level or in the acquiree’s ledger. Top-side adjustments made by the parent sometimes are pushed down to the acquiree ledger, and several intercompany eliminations are often required. If an entity must prepare standalone subsidiary financial statements, the impact of purchase accounting and whether it can be pushed down will depend on whether it is being reported under US GAAP or IFRS. These operational and accounting complexities can prove to be tedious if not planned for upfront or if maintained manually over time. 

Public company readiness

As companies evaluate the potential for a future public offering (through traditional IPO or SPAC merger), they must grapple with the significant uplift in financial reporting requirements needed to operate as a public company. Investor-grade financial reports will need to be created in a short period of time. Manual aggregation of subsidiary ledgers and top-side adjustments can extend the close process and contribute to human error. Consolidation systems can help companies be “public company ready” by automating the creation of financial statements, and allowing companies to use one set of data to drive GAAP, XBRL, management, and segment reporting with automated controls and validation rules along the way. 

Regulatory changes

There are often accounting rule updates under US GAAP or IFRS that require transformative changes to a company’s books and records, processes, and data. This was made clear as companies around the world implemented new revenue recognition and lease accounting rules. Implementation of new accounting rules across all legal entities and jurisdictions requires accounting expertise and significant time investment. The implementation process is often much more efficient when there is a single source of truth for ledger data within a consolidation system rather than across several disparate ledgers and systems. 

GAAP conversions

Companies often must respond to changing investor and regulatory financial reporting requirements by changing accounting frameworks between US GAAP, IFRS, or local country-level GAAP. This often requires implementation of new systems, redesigning processes and accounting manuals, as well as reporting packages. Consolidation systems specifically make it easier for companies to import subsidiary ledger data and book postings for multiple types of GAAP (e.g., local accounts, IFRS, US GAAP, tax, etc.)

Non-financial reporting

There are transformative changes coming as regulators begin enacting climate-related disclosure requirements. There are several reporting frameworks that companies will need to be in compliance with depending on their operational footprint. For example, SEC requirements and the Corporate Sustainability Reporting Directive (“CSRD”) will require enterprise-wide updates to data gathering, analysis, and reporting. These new types of group reporting, not yet available in existing systems or offline spreadsheets, can be addressed by optimizing the use of a consolidation system. Several consolidation software packages have ESG modules that allow firms to embed ESG key performance indicators with financial performance to help decision making and reporting.

Benefits of a consolidation system

Several software solutions exist in the market for financial consolidation, and we often find that they present great opportunities to accelerate and enhance the quality of the group reporting process. They can easily pull financials from multiple ledgers and supplementary source systems, automate the processing of certain consolidation adjustments (e.g., eliminations, currency conversions, and corporate adjustments), provide a mechanism to handle complex chart of account structures across entities, and enhance financial analyses by enabling users to cut and analyze the consolidated financial information into multiple views.

Additionally, companies are increasingly using their consolidation systems as Enterprise Performance Management (“EPM”) tools. The financial data within the system is used across the company for budgeting, planning, and forecasting, in addition to consolidation, in order to analyze and optimize business processes. This allows it to be a “single source of truth” with financial data that can link business strategy with execution. These tools typically include an interface with “last mile” financial reporting tools (e.g., disclosure management or BI reporting) that allows for an automated linkage as financial data flows from budgeting, to actuals, to reporting. 

While there is no replacement for a robust, integrated ERP system to house transactional data and support day-to-day operations, consolidation systems can sit above multiple ERP instances and can provide a single source of truth to support management reporting, analysis, and financial reporting needed by internal managers and stakeholders/regulators.

How can PwC help?

Our team of technology and accounting specialists work side-by-side to help organizations implement consolidation systems, optimize their finance processes, and upskill end users. We combine our expertise in accounting principles, financial reporting regulations, finance, and information technology/systems to accelerate our clients’ digital transformation journey. 

For each of the business changes discussed, technology implementation must be a cross-functional effort, with users from across the organization working together with accounting and reporting experts to configure the system setup and optimize the surrounding processes. PwC has strategic alliances with several technology providers that allow us to work together to help you identify and implement an existing consolidation system solution on the market based on your business needs, or build a custom digital solution specific to your firm. 

We have a deep understanding of accounting and financial reporting frameworks (e.g., US GAAP and IFRS) as well as non-financial reporting frameworks (e.g., ESG) and can help identify potential data/disclosure gaps. Our team has significant experience in helping companies as they raise capital or engage in M&A, and the accounting and reporting challenges that come with this growth. 

Contact us to learn more. 

Contact us

Tom  Hagenaars

Tom Hagenaars

Partner - Digital Transformation, PwC Netherlands

Tel: +31 (0)88 792 20 32

Verena Glutting

Verena Glutting

Director - Capital Markets and Accounting Advisory, PwC Germany

Tel: +49 69 9585-3506

Steven  Zikeli

Steven Zikeli

Senior Manager - Capital Markets & Accounting Advisory, PwC Netherlands

Tel: +31 (0)64 846 25 08