The board asked for one profit and loss account for 5 companies in 3 currencies, and a budget to hold it against. The first quote that arrived was for a 14 month ERP implementation. The board did not ask for a system. It asked for a number.
The conversation usually starts the same way. There are 5 companies now: the parent, a trading arm, a subsidiary in Germany that sells into Europe, a unit in Dubai, and a small services company that bills the others. Each has its own books, its own accountant, and in 2 cases its own currency. The board wants one profit and loss account for the group, a budget for the group, and a monthly comparison of the 2.
The first quote that arrives is for an ERP implementation. 14 months, a data migration, every company moved onto one system, and the consolidated report at the end of it. The board did not ask for a new accounting system. It asked for a number. Those are different projects, and the second one is a great deal smaller than the first.
Consolidation is 4 disciplines applied to whatever ledgers already exist: a common chart to map to, intercompany eliminated, each currency translated at the right rate, and the exchange rate shown on its own line. None of them requires the 5 companies to share a system.
Five companies means 5 charts of accounts, and they will not agree. One books freight under cost of sales and another under selling expenses. One has 40 revenue accounts by product and another has 1. The instinct is to force every company onto a single chart. The cheaper and faster answer is a group chart with a mapping: every local account points at exactly 1 group account, and the mapping is a table the group accountant owns.
The mapping does 2 jobs. It produces the consolidated statement, and it makes the budget comparable, because the budget is set on the group chart and the actuals arrive on the local one. The test of a good mapping is that a local accountant can add an account without asking anybody, and the group accountant finds it in an unmapped list at month end rather than in a wrong total.
The parent sells 3,000,000 of goods to the German subsidiary during the year. In the parent's books that is revenue. In the subsidiary's books it is a purchase. Add the 5 companies together and the group has 3,000,000 of revenue it never earned from anybody outside itself, and the same 3,000,000 of cost.
Eliminating it is the easy part: take it out of both sides. Two things make it hard in practice.
The services company that bills the others is the same story with no stock, which makes it easier, and with a management fee that the tax authorities in each country will want to look at, which makes it harder. That is a transfer pricing question, not a consolidation one, but the consolidation is where the mismatch is found.
The German subsidiary keeps its books in euro. To add it to an Indian parent, every figure has to become rupees, and the rate used depends on what the figure is.
Sales and expenses accrue across the whole period, so they are translated at the average rate for that period. A month's profit and loss at the average rate for the month; a quarter at the average for the quarter, or, better, month by month at each month's rate and then added.
The balance sheet is a snapshot, so it is translated at the rate on the day of the snapshot. Stock, receivables, cash, payables, all at the closing rate.
Share capital and the reserves brought forward are translated at the rate on the day they arose and never retranslated. This is what makes the balance sheet stop balancing, and the difference is the translation reserve.
The translation reserve is the line that alarms boards the first time they see it. It is not a loss. It is the arithmetic consequence of translating profit at one rate and net assets at another, and it belongs in equity, outside the profit and loss account. A consolidation that pushes it through profit is reporting a currency movement as trading performance, in whichever direction the rupee happened to move that month.
Translating the profit and loss account at the closing rate because it is the only rate anybody looked up. In a month where the currency moved 3 percent, that puts a 3 percent error on every line of the subsidiary's result, in the direction of the move, and it looks exactly like a price change.
This is the piece that turns a consolidation from a statutory exercise into management information, and it is the piece most groups skip.
The budget for the German subsidiary was set in euro and translated at a budget rate. The actual arrives in euro and is translated at the actual average rate. The difference between budget and actual in rupees is therefore 2 things mixed together: how the subsidiary traded, and what the currency did. Sales management can answer for the first. Nobody in Munich can answer for the second.
A worked example, illustrative only.
| German subsidiary, revenue | In euro | Rate | In rupees |
|---|---|---|---|
| Budget | 500,000 | 90.00 | 45,000,000 |
| Actual | 510,000 | 88.00 | 44,880,000 |
| Reported variance | 10,000 up | 120,000 down |
The subsidiary sold 2 percent more than budget. The group report says revenue fell.
Restate the actual at the budget rate and the 2 effects separate cleanly.
| The bridge | Amount | Owner |
|---|---|---|
| Budget, at budget rate | 45,000,000 | |
| Operating effect: 10,000 euro more, at 90 | 900,000 | Sales, Germany |
| Actual restated at budget rate: 510,000 at 90 | 45,900,000 | |
| Exchange rate effect: 510,000 at (88 minus 90) | (1,020,000) | Treasury |
| Actual, at actual rate | 44,880,000 |
900,000 favourable from trading, 1,020,000 adverse from the currency, net 120,000 adverse. Both figures are now true, and each has an owner.
The same restatement applies to every cost line, and the sum of the exchange rate effects across the subsidiary's profit and loss account is the currency's contribution to the group result for the period. That is a single figure the board can look at, decide whether to hedge, and stop discussing.
A group budget is built in each company's own currency, because that is where the people who will be held to it live, and translated at a stated budget rate that is fixed for the year. The temptation to update the budget rate mid year when the currency moves should be resisted: the moment the budget rate follows the actual rate, the exchange rate effect disappears from the bridge, and with it any chance of knowing what the currency cost the group.
Intercompany sales are budgeted too, so that the group budget can be consolidated the same way the actual is. A budget that shows 3,000,000 of revenue between the parent and Germany, against an actual with it eliminated, will never compare.
Every discipline above works on trial balances. A trial balance is a list of accounts and balances, it is the same shape in every accounting system ever written, and every one of those systems exports it. The consolidation needs the 5 trial balances every month, the mapping table, the intercompany balances, and the rates. It does not need the 5 companies to share a chart, a database, or a vendor.
A group ERP project solves a different problem: one order to cash process, one stock ledger, one supplier master across the companies. Those are worthwhile when the companies actually share customers, stock or suppliers. When what they share is an owner and a board pack, the ERP project delivers the consolidated report in month 14 as a by product, and the same report could have been produced in month 2 from the exports.
Niyantrak Consulting builds group consolidations for owner managed groups of 3 to 15 companies, usually across 2 or 3 currencies, and usually on top of the accounting systems the companies already run. The work is the mapping, the intercompany discipline, the rate policy, and a month end that closes on a date.
Niyantrak Budgeting is built for exactly this shape of group. It holds a group of companies, each in its own currency, a budget per company at a fixed budget rate, actuals taken in monthly, and a consolidation that translates each line at the right rate and puts the exchange rate effect on its own line of the bridge. Intercompany eliminations are entered once and applied to both the budget and the actual. It runs alongside whatever the 5 companies already use, on your own computer, and no ledger leaves the building.
A short conversation is usually enough to tell whether the mapping, the intercompany, or the rate policy is what is slowing the month end. Niyantrak Consulting builds consolidations for owner managed groups on top of the systems they already have.