Posted on 11 May 2020
Expertise in Consolidation: The Key to Maintaining a Global Overview
In today’s increasingly competitive global markets, and at a time where businesses are confronted with an ever expanding scope and complexity of accounting and fiscal regulations, the possibility of outsourcing the production of consolidated financial reports into the hands of experts is becoming an attractive and indeed financially sensible option for a wide range of businesses.
As reporting requirements continue to diversify and expand into new domains, a broader scope of businesses are indeed now required to produce consolidated reports on a regular basis. In addition, the intrinsic value for a business to have access to the information that a consolidated report presents—essentially a global overview of the financial status of the business or group—is clear, leading some companies to decide for themselves to have these reports regularly produced.
Nevertheless, coping with the large amount of dense information that encompasses a business’s operations often extends beyond the scope of their in-house expertise when the need (or inclination) arises to produce consolidated reports. This can pose a great challenge and strain on a company, particularly in cases where there are high stakes attached to the production, and findings, of a consolidated report.
Outsourcing to gain a competitive edge
Traditionally, outsourcing initiatives focused mainly on functions of lower added value, based on the recognition that externalising such functions would lead to a substantial reduction in costs. The decision to outsource an activity is inevitably the result of a careful cost-benefit analysis, leading to the conclusion that externalising the function simplifies and streamlines the production process, while substantially reducing overhead costs.
Recently, however, outsourcing is steadily expanding into more complex domains and including activities of critical importance to a business’s core objectives. A growing number of companies are choosing to outsource critical tasks which do not directly fall into their realm of expertise, consolidation and reporting being prime examples.
In such cases, the decision to outsource is based on a different cost-benefit analysis, where companies discover that outsourcing this complex task into the hands of experts adds real value and will contribute to the long term growth of their business.
Simplifying the complexities
Faced with an expansion in, amongst other things, the scope and complexity of accounting and fiscal legislation, businesses are detecting a greater need for experts when consolidated reports must be produced. Structures and transactions are increasingly subject to constraints related to financial reporting standards, which are linked to such factors as the accounting framework being used, the size of the business, and the sector of activity in which they are operating.
The frequency of consolidation reporting has accelerated considerably for some players. Increasingly, real estate groups and other investment funds are publishing their consolidated financial performance on a quarterly, or even monthly basis. In order to meet the needs of investors and management, businesses today must produce consolidated reports while respecting continually evolving standardised reporting frameworks, within an ever shorter time period. To cope with these new demands, groups must have access to quality procedures and powerful consolidation systems, which require certain resources to be at their disposal, as much in terms of time as in terms of expertise. In an environment where businesses are fiercely competitive and must continually battle to demonstrate an ever strengthening performance, these pressures can easily sway some towards outsourcing.
Externalising of the production of consolidated reports may, in many cases, be a very legitimate response to the increasing complexity of the regulations of financial reporting. This solution brings flexibility to a function which could prove to be costly in view of needs which are by nature unpredictable.
Selecting the right provider to ensure success
Selecting an appropriate external provider for consolidation is the key to better performance. The decision to outsource, however, cannot be taken lightly, and the process must be very carefully planned. Once the business selects a provider, the two must work in unison in order to establish a clear understanding of needs and an appropriate strategy, and develop a relationship based on trust.
According to Jurgita Giedraityte, Head of Consolidation and IFRS at Alter Domus, “When selecting an outsourced provider for consolidation, it is important that they have a wide range of resources and expertise at their disposal and a high level of flexibility in setting up services that are tailored specifically to its clients based on their size, organisation and complexity of the clients operations.”
Consolidation being a complex domain, the choice of provider is crucial. Those pursuing an outsourcing option must seek out providers who possess highly experienced teams with a solid set of technical accounting skills, a mastery of specific technological solutions and excellent organisational competencies. They should be knowledgeable about consolidation, reporting standards including IFRS, and the client’s industry segment.
Jurgita explains, “Our consolidation team mainly serves real estate funds which many may assume are simple groups to consolidate. After all, their investment properties are rented out, and the main intercompany transactions are linked to financing. However, in practice, we face many unique cases that require extensive research or discussions with auditors and clients in order to treat. With some groups boasting more than 100 entities spread throughout various countries with different foreign currencies and local accounting standards, clients are practically thankful to be able to outsource this work to experienced professionals who also have the proper tools in place to run consolidation.”
Having high-quality and timely consolidated reports can give companies a competitive advantage, as they allow the business to clearly communicate the state of affairs to its clients and investors. The need for strong, trust-based outsourcing relationships between client and provider are taking on a new level of significance as the frequency and importance of consolidated reporting grows.