Multi-entity consolidation: principles before mechanics
Before touching elimination entries, the operating questions a group structure has to answer.
Multi-entity consolidation has the reputation of being a mechanical exercise — elimination entries, intercompany matching, FX translation. The mechanics are real. They are also downstream of decisions that get made at the group structure level long before any consolidation happens.
Four questions the structure has to answer
1. What does each entity actually do?
An entity that holds IP, an entity that employs staff, an entity that bills customers, and an entity that holds cash are four different accounting profiles. The consolidation has to reflect what each entity is for — not just what is in each entity's books.
2. Where do transactions originate?
A customer invoice raised in the US sub but funded by the Caymans parent has two legs that have to flow correctly. The intercompany pattern needs to be the same for every transaction of that type, or the consolidation breaks.
3. What is the reporting currency, and where does FX translation happen?
Each entity reports in its functional currency. Consolidation translates to the group's presentation currency. The translation method (current rate, temporal) matters, and so does the FX rate source.
4. What is being eliminated, and why?
Intercompany revenue, intercompany payables, intragroup investments — all eliminate on consolidation. Each elimination needs a clear rule, applied consistently. Ad-hoc eliminations are the source of most consolidation pain.
Answer the four questions before touching the elimination entries. The mechanics follow from the answers.