Financial consolidation is the work of adding the accounts of every company in a group into one set of accounts for the whole group. A group is a parent company together with its subsidiaries, the companies it owns. The result is called the consolidated financial statements. In India, the Companies Act requires a company with subsidiaries to prepare them, alongside its own standalone statements. Consolidation is a part of financial planning and analysis (FP&A) software.
It is more than adding up. Three adjustments come first. Subsidiaries abroad keep their accounts in their own currency, so their figures must be converted into rupees. Sales between group companies must be removed, because a group cannot earn money by selling to itself. This is called intercompany elimination. And if the parent owns less than 100 per cent of a subsidiary, the share that belongs to the other owners must be shown separately.
Take, for example, a spice exporter in Kochi. It owns all of a trading company in the UAE, which sells the exporter's spices to shops in the Gulf. In one year, the Kochi company records sales of ₹400 crore. ₹60 crore of that is spices sold to its own UAE company. The UAE company records sales of 4 crore dirhams to its customers. At ₹26 to a dirham, that is ₹104 crore. Added together, the two companies show ₹504 crore. But the ₹60 crore was a sale inside the group. The software removes it, so the group's consolidated sales are ₹444 crore.
The software collects each company's closed figures from financial close software or from its ERP. It maps each company's accounts to the group's chart of accounts, the standard list of account names. It converts currencies at the right rates, applies the eliminations and produces the reports. Each adjustment is recorded, so that an auditor can trace every number back to its source. The eliminations depend on reconciliation: both companies' records of the ₹60 crore must agree before it can be removed.
The same software often does tax provisioning. It estimates the income tax that each company will owe for the year, before the return is filed, because that estimate must appear in the accounts. The group's legal structure, which company owns how much of which, is kept in entity management software.
Consolidation used to be done in spreadsheets, often over two or three weeks after the period ended. Listed companies in India must publish their results every quarter within a fixed number of days, so speed matters.