What Is Financial Consolidation? The Ultimate Guide For 2025

According to a survey by APQC, most companies spend four to ten days just on financial consolidation. This process is a crucial and time-consuming task for finance teams. If not handled properly, it can significantly impact your close process.

In this blog, we will simplify the financial consolidation process into three simple stages: collecting data, consolidating it, and reporting results while sharing practical tips to avoid common roadblocks and speed up your close.

What Is Financial Consolidation In Accounting?

Financial consolidation is the process by which financial data and financial statements from multiple entities are combined and merged into a single report.

This process allows a parent company to combine its financial information with its subsidiaries and subdivisions. This shows a business as a single economic entity.

Why Is Financial Consolidation Important?

Financial consolidation is not about just combining data. Companies with multiple entities, subsidiaries, or complex structures find consolidated financials valuable in many ways.

Companies can learn about their overall financial health through proper financial consolidation. Without it, businesses might miss cash flow problems, over-leveraging issues, or heavy tax burdens hidden in separate subsidiary reports.

Some benefits of financial consolidation include:

• Decision Making - Consolidated statements show a complete picture of an organization's financial health. This helps in assessing overall performance, cash flow, and profitability in subsidiaries of all sizes. 

• Tax Optimization -Companies can use consolidated financial data to reduce taxes by balancing losses in one subsidiary against profits in another.

• Building Stakeholder Trust - One of the biggest benefits of financial consolidation is improved transparency. It gives investors, partners, and shareholders a clear view of the company’s overall performance. 

Three Stages Of Financial Consolidation

Whatever the company's size or complexity, the financial consolidation process follows through three stages: data collection, data consolidation, and reporting final results.

Stage 1: Data Collection

The first stage of financial consolidation is collecting financial data from each subsidiary. This usually includes adjusted trial balances, primary statements, and standardized reporting with additional details.

In this stage, finance teams may need to pull balance sheets or review general ledgers line by line to view transactions of subsidiaries being consolidated.

Stage 2: Data Consolidation

In the second stage, the collected data is consolidated into single financial statements. Activities in this stage involve cross-checking transactions to remove duplicates, such as intercompany sales, and convert all entries into a common currency. They also record adjusting journal entries for parent-level considerations, eliminate intercompany transactions and more.

Stage 3: Reporting Results

The final stage of financial consolidation is basically turning the consolidated data collected in earlier stages into reports and insights. This involves creating a consolidated trial balance and financial statements.

Finance teams also prepare specific reports to share with lenders, shareholders, or business partners. They also make compliance reports to meet the rules set by regulators or government agencies.

A financial consolidation software simplifies the process. It automates data collection, performing complex calculations and producing accurate reports automatically.

Data Required For Financial Consolidation

Companies need the right data from their organization to consolidate finances successfully. Let's get into six crucial data components needed for this process.

General And Sub Ledger

The general ledger is the foundation of financial consolidation, capturing all transaction records and account balances with every debit and credit posts to the appropriate accounts. 

Subledgers provide detailed activity for specific accounts, like accounts payable or receivable. These subledgers are crucial as they help track down original entries and make necessary adjustments during the consolidation process.

Foreign Exchange Rates And Currency Conversion

Currency conversion is one of the most important data sets for financial consolidation. Since different subsidiaries generally operate in different local currencies, the amounts need to be translated into a single currency.

Average exchange rates are applied to flow accounts (revenues and expenses), and ending rates are applied to balance sheet accounts. To ensure accuracy across all entities or subsidiaries, finance teams rely on both direct and indirect rates.

Tax And Cash Flow Data

Parent companies need complete tax information from subsidiaries to prepare consolidated tax returns. This includes capital gains/losses, foreign tax credits, and operating losses.

In addition, each entity also provides individual cash flow information and bank account details to create consolidated cash flow statements.

Intercompany Transactions

Intercompany transactions should be carefully identified and removed to avoid counting them twice. Three main types exist:

• Stock ownership (assets and stakeholder equity)
• Debt (loans between subsidiaries or parent-subsidiary)
• Revenue/expenses (sales, interest on loans, cost of goods sold)

Investment And Equity Data

Investment and equity data highlight the ownership relationship between a parent company and its subsidiaries. When a subsidiary is only partially owned, calculations for non-controlling interest are required to show the share of ownership held by outside parties.

Methods Of Consolidating Financials

Companies use different methods to consolidate financial statements. These methods affect how a subsidiary's financial information shows up in consolidated reports.

Full Consolidation

When a parent company controls over 50% of a subsidiary, it uses full consolidation. This method involves:

• The parent company includes all of the subsidiary's assets, liabilities, and equity on its balance sheet.
• The income statement of the parent company combines all revenues and expenses from the subsidiary.
• Companies must eliminate intercompany transactions to avoid double-counting.

Equity Method

The equity method is used when an investor has significant influence but not full control over the company, usually with 20% to 50% ownership. This method includes:

• Recording the initial investment at its original cost on the balance sheet.
• Adjusting the investment’s value over time based on the investor's share of the company’s profits or losses.
• On the income statement, the investor reports their share of the company’s income.

Proportional Consolidation

Proportional consolidation lets parent companies report their share of assets, liabilities, revenues, and expenses on their balance sheet.

However, in 2013, both U.S. GAAP and IFRS discontinued this method. Now, most companies rely on either the full consolidation method or the equity method.

Key Steps In The Financial Consolidation Process

A finance team must follow a clear and organized process to prepare accurate and compliant consolidated financial statements. Below are seven key steps in the financial consolidation process:

Step 1 - Define Scope And Timeline

The first step is deciding which subsidiaries should be included in financial consolidation. This selection depends on the percentage of the parent company’s ownership in each subsidiary.

In addition to this, realistic deadlines need to be set and reporting schedules should be aligned across entities.

Step 2 - Collect Financial Data

In this step, the parent company has to collect adjusted trial balances and main financial statements (balance sheets, income statements, cash flow statements) for each subsidiary.

After the data is collected, it should be cleaned, verified and validated. You can automate this process by using financial consolidation software.

Step 3 - Standardize And Map Accounts

Accounting policies should be aligned across entities. Then, the local chart of accounts is mapped to the corporate structure, usually with a company-wide account chart.

In this step, finance teams also flag any inconsistencies, missing entries, or currency mismatches.

Step 4 - Translate Foreign Currency

Each subsidiary operates in a different currency. This step involves converting the results into a single reporting currency. Balance sheet items use current exchange rates, and income statement items use weighted average rates.

Step 5 - Settle Intercompany Transactions

This step mainly involves reconciliation of intercompany transactions. Finance teams begin by identifying transactions between subsidiaries and the parent company and use invoice numbers to match them accurately.

Ideally, each subsidiary should handle its own reconciliation as it helps streamline the process.

Step 6 - Eliminate Intercompany Items And Post Adjustments

Intercompany transactions should be removed during the financial consolidation process. This step involves the elimination of these transactions, wherever applicable.

Step 7 - Prepare And Review Consolidated Reports

Finally, all financial data is combined into consolidated balance sheets, income statements, and cash flow statements. The parent company also has to prepare specialized reports for lenders and shareholders. 

Financial Consolidation Example

An example of financial consolidation makes the concept even clearer.
Imagine a parent company that reports $2 million in annual revenue along with $750,000 in assets. Its subsidiary, on the other hand, shows $1 million in revenue and $400,000 in assets.

Looking at the parent company's numbers might make the entire business seem smaller. However, when consolidated financial statements bring everything together, it shows $3 million in revenue and $1.15 million in assets. This gives a more complete view of the company's performance.

What Are The Challenges In Financial Consolidation

Companies still face major challenges in consolidating their financials, despite advances in modern technology. The efficiency of the consolidation process is impacted by different challenges:

Manual Errors And Time-Consuming Process

Finance teams spend 60-70% of their consolidation time on just verifying data accuracy. On average, financial consolidation adds 4-10 days to the close process.

Manual data entry not only slows the process but also increases the risk of issues in the final consolidation report.

Data Collection Issues

Collecting financial data from multiple sources is another major challenge. Subsidiaries often rely on different accounting systems, use different currencies, and report in their own formats, making the data collection process difficult.

As companies expand, collecting data from different subsidiaries becomes nearly impossible without standardized processes.

Complex Currency Translations & Inconsistent Reporting Standards

One of the biggest challenges in financial consolidation is handling multiple currencies and differing accounting standards. Translating financial results from multiple countries and fitting U.S. GAAP with IFRS takes a lot of effort and time. This can lead to mistakes and delays in reporting.

How To Improve The Financial Consolidation Process

Modern finance teams can cut their close times and boost accuracy by improving their financial consolidation process. Here are some successful ways teams can optimize their process:

Automate Data Collection

Using automated financial consolidation software to extract data directly from source systems helps in reducing errors and improving consolidation time by 40-60%.

Cloud-based software makes this process even easier as it connects accounting systems across subsidiaries.

Streamline Intercompany Processes

Intercompany transactions are one of the complex parts of the financial consolidation process. Without streamlined processes, matching invoices and reconciling balances across entities can delay the close process.

Implement standardized templates for all subsidiaries and use specialized intercompany hubs to match transactions automatically. 

Simplify Adjustments

Aligning accounting policies across subsidiaries helps in reducing the need for manual adjustments. AI and machine learning tools help in automating most of the elimination and adjustment tasks.

Some of these tools also provide a central repository that stores all intercompany data, ensuring transactions are consistent and easy to review.

Enhance Reporting Visibility

Dashboards give real-time updates on the financial close status by subsidiary, while AI-generated summaries add insights to reports and help in saving valuable time.

How To Choose The Best Financial Consolidation Software

Choosing financial consolidation software is not just about buying a tool, it is more about finding the right solution that fits your business needs.

This should ideally start with a thorough analysis of internal needs and documenting the functional and technical requirements from every department that will use the system.

Companies that buy the right financial consolidation software cut their close times by 50%-60%. Here are some key capabilities to look for:

• Integration Capabilities: Look for software that connects with your existing systems or ERPs.

• Complete Functionality: The solution must handle all critical consolidation tasks, including combining revenue and expenses as well as removing intercompany transactions.

• Automation Features: Focus on solutions that offer automation features that help in reducing manual effort and errors.

• Scalability: The tool should be scalable, capable of handling new entities, entering new markets, or meeting new reporting requirements.

How Financial Consolidation Is Different From Other Consolidation Process?

Individual Vs Consolidated Financial Statements

An individual financial statement reflects the financial standing of just the parent company. A consolidated statement combines the financial performance of the parent company with its subsidiaries. These statements are different in several ways:

• Scope: Individual statements focus on a single entity. Consolidated statements give a detailed view of the entire organization, including subsidiaries.

• Preparation complexity: Creating individual statements is a lot easier since they involve one company's financials. Consolidated statements are more complex since they need adjustments that account for intercompany transactions.

• Investor value: Investors are able to use consolidated statements to understand how combined financial performance affects overall value, revenue, and risks.

Financial Consolidation Vs Business Consolidation

Financial consolidation focuses on combining financial data, whereas business consolidation focuses on creating a new corporation by combining two or more businesses. The main reason behind consolidating businesses is to increase market share and boost profitability.

Financial Consolidation Vs Financial Close

Financial consolidation is a part of the broader close process. The consolidation and close process changes raw financial data into approved, enterprise-level financial statements.

Financial consolidation deals with data consolidation, and financial close includes everything needed to finalize financial records for a period.

Financial Consolidation Vs Consumer Debt Consolidation

These concepts only have similar names, but they work in very different ways. Consumer debt consolidation lets people combine their separate personal loans into one loan. Financial consolidation combines the financial data of a company, including its subsidiaries. 

How Can Highradius Help?

Highradius stands out in the financial consolidation space by delivering practical, results-driven AI for record to report processes. Our platform has over 200 LiveCube agents that automate more than 60% of close tasks. The record to report solution offers immediate anomaly detection powered by 15+ machine learning models that optimize continuous close with guaranteed business outcomes.

The ERP-agnostic solution naturally connects with major systems like SAP, Microsoft Dynamics 365, Oracle, NetSuite, and others. Our methodology guarantees quick implementation and ROI within 3 to 6 months.

Some of the key features of the software include:

• Customizable Reporting: HighRadius can be tailored to fit your company’s reporting needs, automating old, inefficient processes without disrupting them. It comes with templates and an easy, Excel-like interface for quick report customization, saving time and improving flexibility.

• Easy CoA Alignment: This feature automatically aligns local financial charts to the group’s chart using rules-based configurations and learning from past mappings. It applies that knowledge across different business units, streamlining the consolidation process and reducing manual effort.

• User-Friendly: HighRadius is simple to learn. Finance teams can create their reports and start using the platform in less than 30 days with minimal IT support.

• Scalable: HighRadius grows with your business, handling unlimited reports and entities without extra rework, all managed by the finance team. This scalability ensures the solution can adapt as your business expands.

FAQs On Financial Consolidation

1. What is the purpose of financial consolidation?

The main purpose of financial consolidation is to create one report that shows the overall financial health and performance of both the parent company and its subsidiaries

2. When does financial consolidation and close happen?

Financial consolidation and close happen at the end of a company’s accounting period. This can happen every month, quarter, or year. It begins at the start of these periods and continues through them, not just at the end.

3. What is the future of financial consolidation?

New technology like Robotic Process Automation (RPA) will be able to handle more complex manual tasks in financial consolidation. AI-driven predictive analytics will help identify patterns in financial data, which can improve forecasting and business planning.

4. Which mistakes should you avoid when consolidating financials?

Common consolidation mistakes include:

• Wrong elimination of intercompany transactions (lateral, upstream, and downstream)
• Missing currency conversion adjustments
• Different accounting practices across subsidiaries
• Breaking regulatory rules

5. Are there any regulatory or compliance requirements for financial consolidation?

Yes. Businesses have to adhere to standards like GAAP, which is rules-based and outlined by FASB, or IFRS, which focuses more on principles and is defined by IASB. US based companies also need to meet requirements from the SEC and the FRB.

6. Which entities are involved in financial consolidation?

Three main types of entities take part in consolidation: the parent company (controlling entity), subsidiaries (companies under the parent company’s control), and Variable Interest Entities (VIEs), where control comes through financial arrangements instead of ownership. 

7. What is the impact of modern technology on financial consolidation?

Modern technology makes consolidation easier by automating data gathering and applying checks to ensure accuracy. It also helps simplify reporting. AI can also handle complex tasks like mapping source data to systems, while also managing more detailed financial and operational data.