On the surface, the concepts of financial consolidation vs. data aggregation might seem to mean the same thing. But financial consolidation is more than just rolling up or aggregating numbers. And to perform financial consolidation accurately and efficiently requires a purpose-built software application designed for the task.
Simple Data Aggregation
Let’s start with the concept of simple financial data aggregation. This is basically any process in which information is gathered and expressed in a summary form, for purposes such as statistical analysis. In the case of aggregating sales data from different locations – this would mean simply gathering the sales numbers for each location and adding them up to get a total. Then one could analyze how each office contributed to the total. See example below:
For the purposes of financial reporting of results in the form of a consolidated income statement and balance sheet to stakeholders (in accordance with US GAAP, IFRS or other global reporting guidelines) consolidation is more than just adding up or aggregating data. In financial consolidation, there are specific calculations and accounting adjustments that need to be made as the numbers are consolidated from the subsidiary level to the parent company level. This includes steps such as:
- Foreign currency translation – with accounting rules applied correctly for income statement vs. balance sheet accounts
- Elimination of intercompany transactions and balances
- Adjusting journal entries
- Accounting for partial ownership, joint ventures
While accounting departments performed financial close on a manual basis for many years, in today’s world there are several types of software tools used to support financial consolidation and reporting.
- General Ledger System – the GL module of today’s ERP systems typically has many of the required features and works well if an organization has a single ERP system. But this approach can become cumbersome if there is a need to collect and consolidate financial results from multiple systems used by different locations or subsidiaries, and GL’s don’t provide the flexibility to consolidate across multiple hierarchies, or to support what if analysis for potential mergers or acquisitions.
- Spreadsheets – while spreadsheets are widely used by Finance and Accounting professionals, they weren’t designed to support a complex process, such as financial consolidation. Loading data from different systems is a manual process using spreadsheets. And with hundreds of tabs being consolidated in a workbook, the spreadsheet can become difficult to maintain and performance will degrade. Undetected errors can easily occur with the lack of adequate controls. And spreadsheets don’t provide adequate audit trails regarding changes to financial results.
- Purpose-Built Financial Application – purpose-built financial consolidation applications are becoming the preferred approach for large enterprises. They are designed to integrate data from multiple sources, have specific functionality built in to handle the complexities of financial consolidation, and typically have all the required security and audit trails. While these systems have historically been deployed in on-premises data centers, they are now available as cloud or software as a service (SaaS) offerings.
Evaluating Packaged Consolidation Applications
Not all packaged financial consolidation applications are equal in capabilities. There are differences in feature sets that should be carefully considered. Some are designed to support basic financial consolidations, while others are designed to support complex consolidations – with complex ownership structures, intercompany relationships, and statutory reporting and audit requirements.
There are also differences in the underlying database engines that are used to handle financial consolidations. Any vendor whose product uses an on-line analytical processing (OLAP) database such as Microsoft Analysis Services, Oracle Essbase, IBM Cognos TM1, SAP HANA or a similar straight aggregation engine will face numerous challenges to address core financial consolidation requirements described earlier, such as currency translation, intercompany eliminations, journal adjustments, partial ownership, consolidation status and cash flow algorithms. And they aren’t designed to provide an accurate audit trail for each step in the process of how the data for a specific entity is calculated, adjusted, translated, and eliminated into each of its parent entities.
There are really only a few purpose-built financial consolidation engines in the CPM market. Oracle Hyperion Enterprise (now unsupported) and Hyperion Financial Management had purpose-built financial consolidation engines. OneStream XF is a more modern platform that has a purpose-built financial consolidation engine.
Although many vendors claim financial consolidation as a core capability, most have settled on using a straight aggregation engine instead of implementing a purpose-built financial engine. Vendors that have enjoyed some initial success with planning-only solutions are now facing market pressures that are forcing them to inaccurately claim that they have true financial consolidation capabilities.
To learn more download our Financial Consolidation and Reporting eBook.
John O’Rourke is Vice President of Product Marketing at OneStream Software. With a background in accounting and finance, John has over 30 years of experience in the software industry, including 20 years of experience in product marketing at Hyperion Solutions, Oracle and Host Analytics. He has worked with many customers and partners on financial reporting and planning initiatives and has spoken and written on many topics in corporate performance management. John has also held positions in strategic marketing and product marketing at Dun & Bradstreet Software, Kenan Systems and Decisyon. Find me on: