Group Structure for Financial Consolidation Automation

Today’s article kicks off a practical series on automating financial consolidation.

Despite almost universal ERP coverage—and a steady rise in IFRS reporters—many large groups still compile consolidated statements in Excel and consider full automation ‘next year’s project’.

Drawing on lessons from several recent implementations, that helped us to refine virtually every methodological approach, we’ll focus on the design decisions that matter most, starting with the group‑structure model and the capabilities your consolidation software needs to support.

The foundation of any automated group consolidation is the group’s structure that is, the hierarchical relationships between consolidated legal entities.

Specifically, for IFRS consolidation purposes, the vast majority of cases use a structure defined by ownership relationships the legal structure. This structure reflects ownership percentages between group companies.

While most groups use legal ownership as the primary hierarchy, several features make the model non‑trivial:

• Joint ownership – one entity held by multiple group companies.
• Cross‑ownership – entities holding shares in each other.
• Multi‑level sub‑groups – several layers of intermediate holding companies.
• Step acquisitions/disposals – control changing part‑way through a period.

Practice shows that beyond the legal structure, users may benefit from other structure types:

• “Flat” structure — where group companies are arranged in a single chain, used for analysis and reporting purposes. This view most clearly shows each company's contribution to the group's financial results.
• “Segment” structure — practice shows that in most cases, operating segments for IFRS 8 disclosure purposes are formed by grouping companies into segments. Using a separate consolidation structure for these purposes is the simplest way to generate disclosure data.
• “Special” structure — for preparing consolidated statements for a group of companies different from the legal structure (for various management purposes), both in terms of company composition and specified ownership percentages.

The system must:

1. Roll direct percentages up the hierarchy to calculate effective ownership.
2. Propose a consolidation method using rules that reflect IFRS 10, 11 and 28.
3. Allow a user with sufficient authority to override the proposal and document the reason.

Typical default rules:

• 50 % effective ownership — Full consolidation.
• 20–50 % — Equity method.
• Contractual joint control — Proportionate consolidation.
• Other cases—Specific method (rare).

It’s important to consider that a group of companies is a living organism, constantly changing over time. The software must be able to track these changes chronologically.

Changes in group composition—such as acquisitions, disposals, combining companies into groups or specified periods, mergers into single legal entities, and splits of companies—must account for how companies were historically included in the group to correctly reflect all changes from an IFRS perspective. Automated change management procedures must consider many methodological aspects; otherwise, additional calculations and consolidation entries will need to be made outside the system.

Beyond a company’s membership in the consolidated group, the automated system should store data about its functional currency for subsequent automatic conversion to the reporting currency. For some groups, it would be useful if the system could accommodate reporting in two or more presentation currencies.

A territorial attribute indicating group companies’ locations in different countries or regions can enable automation of deferred tax calculations both for individual companies and the group as a whole, based on the specified income tax rate for each territory.

A clean, well‑governed group‑structure model is the cornerstone of any consolidation‑automation initiative. Capturing ownership‑data granularity, effective‑dated changes and alternative reporting views up front will prevent manual adjustments later and support reliable, audit‑ready financial reporting.

July 3 at 12:30 PM

Join our free webinar on "Key Considerations in Automating Financial Consolidation" to explore how to:

• Structure your group and chart of accounts effectively
• Handle data collection and multi-currency challenges
• Automate intercompany eliminations, adjustments, and cash flow reporting
• Set the right level of analytics and detail in your system

Register now