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Locks Ltd., Doors Ltd., and Trading Ltd., which are subsidiaries of S&S Ltd., have kept track of all transactions that have occurred between them during the year. Hall, a junior accountant at S&S Ltd., is now faced with the task of preparing the consolidated accounts for the group.

Hall assumes that consolidation merely means adding up the financial results of each subsidiary into the accounts of the holding company, S&S Ltd. This seems simple enough: he begins work but has to verify some information with Gregory Controllo, the group controller. When he does, Gregory stops Hall’s work, informing him he is not complying with group accounting procedures.

Gregory explains that Hall cannot simply add up the results of each subsidiary into a single total as he has started doing. Approaching group accounting in this way means that an increase in the number of transactions between subsidiaries would result in inflated revenues and cost figures for the group as a whole. Since transactions between subsidiaries and other related parties do not reflect objective valuation of goods and services, these must either be eliminated or disclosed in the report of the group’s financial performance.

First, Gregory explains the procedures that prevent intercompany transactions from biasing the group’s financial results. While CEOs of subsidiaries have been able to get around these procedures in the past, Gregory has put in controls that prevent such occurrences from happening again. In addition to eliminating the effects of intercompany transactions, group accounting procedures must also adjust for accounting differences between subsidiaries. These include differences in depreciation policies and functional currencies.

However, intercompany transactions and policy differences aren’t the only concerns in group reporting. Gregory explains that any related third parties must also be identified and disclosed during the group consolidation. This includes the joint venture Locks Ltd. has entered into with Keys Ltd. and any personal relationships that may create undue influence on business transactions.

Hall is relieved that his error was caught quickly. In doing so, he is able to avoid material misstatement and properly convey the financial position and performance of the S&S group.

How effective are your company’s group consolidation procedures? Do you know how to avoid material misstatements when reporting financial performance? The Accenture Academy course Consolidating Group Accounts can help you identify and establish effective procedures for consolidating subsidiaries’ results, even when differing accounting policies or currencies are present. The course will also demonstrate how to identify and disclose all appropriate third-party relationships and avoid material misstatement.

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