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How to consolidate multinational groups

How to consolidate multinational groups with different accounting standards i.e. US GAAP and UK FRS

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Is anyone able to guide me on the steps a U.K. Parent reporting under UK FRS would take to consolidate a U.S. subsidary that reports under US GAAP.

How do multinational groups typically consolidate individual entities that report under different accounting standards?

Do they in practice all report under the Parent Company's home accounting standards? 

I am curious to understand this as I would have thought that due to the differences in different recognition criteria under for example US GAAP and UK FRS this might lead to incorrect or different figures if US GAAP allows for something that UK FRS doesn't allow.

Thanks in advance! 

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By johngroganjga
24th Jun 2019 21:08

You harmonise the figures to a common standard before consolidating them.

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Replying to johngroganjga:
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By Accountant A
24th Jun 2019 21:49

johngroganjga wrote:

You harmonise the figures to a common standard before consolidating them.

Controversial!

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By paul.benny
25th Jun 2019 08:57

For consolidation purposes, all entities need to report under the GAAP of the consolidated accounts - so in your example, UK GAAP

This may mean that subsids need to convert their numbers to local GAAP for local purposes. In practice there are relatively few areas a subsid level where GAAP differs. There may be differences in presentation of financial statements but they do not necessarily affect the underlying accounting.

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By johnt27
25th Jun 2019 11:29

You did read the words US GAAP didn't you? Plenty of potential differences both in GAAP and legal requirements between the UK and US. All this despite talk of harmonisation in IFRS, which is slowly separating again following issues around IFRS 15 and 16.

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By paul.benny
25th Jun 2019 13:24

IFRS15 and 16 will clearly present significant challenges.

Most of the other areas of difference tend not to affect operating subsids - for example hedges, debt, acquisition accounting may differ between US and UK GAAP but the transactions and entries sit at group level.

Presentational matters and disclosures clearly do vary between jurisdictions but are primarily about data collection rather than the consolidation per se.

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Mike Cooper HJS
By mike_uk_1983
26th Jun 2019 11:54

As discussed the local entities would need to have accounts prepared under the accounting standards of the parent company.

As to how multinationals do it, they tend to use IFRS and mandate all subsidiaries also use IFRS where local laws allow. They then give a group wide accounting policy manual to ensure all companies in the group follow the same policies to avoid the need to make changes at a consolidation level.

From my experience between US and UK GAAP there will likely need to be some changes at a consolidation level it will depend how well management control the process.

We have a couple of UK parent companies where the audit isn't all UK and it can be a nightmare when all using different local standards.

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By [email protected]
26th Jun 2019 15:18

Generally you'd consolidate in the HO Home Currency and to HO home standards
Most multinationals would have converted to IFRS by now

As long as your primary record keeping is granular enough, you can report to multiple standards and reconcile between them - a bit of a faff, but doable

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7om
By Tom 7000
26th Jun 2019 16:38

Assuming you are the auditor, the FD will already have consolidated it and allowed for the differences.

You will be auditing not only the UK holding company but checking the overseas auditors work. then you check the consolidation.

If you are doing the consolidation is it material, is always a good point.

The group management letter as well as a summary of the subsids mgt letters you might highlight any differences or you might want to put a reconciliation in, if anyone is bothered, probably not as the FD knows already and has given you this. But you might want to explain to the MD at the board meeting at the end of the audit.

...is my guess...

Ps the apprentice says BPP only teaches IFRS now and not UK GAAP... despite ICAEW allowing a choice of exams ...so all the newly qualifieds will be on the ball with this....

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By dcran
16th Aug 2019 17:35

That’s a real conundrum particularly for international companies, without spending huge amounts of money on technology, in addition to running two sets of books with different accounting standards.

AccountsIQ’s GL and Consolidation software allows you to report your multicurrency subsidiaries in your reporting currency wherever they are based. If your subsidiaries are UK or EU trading entities reporting into a US Dollar Parent then AccountsIQ can handle the FX and the different accounting standards by consolidated monthly journals.

Also, different equity investments and investments from holding companies are often required to be maintained in the parent reporting currency for example the US parent makes an investment in a Sterling or Euro subsidiary and you want to maintain and lock in the exchange rate at the date of the investment so it doesn’t continue to revalue itself on consolidation.

Hope this helps, get in touch if you'd like further assistance/clarification
https://accountsiq.com/consolidation/
https://accountsiq.com/contact-us/

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