Mergers and Acquisitions are one of the fastest ways to grow shareholders’ value. Though it delivers many benefits to an organization in respect to market, revenue and cost, it also brings in many challenges related to system, processes and people.
During an acquisition, the CFO has to wear multiple hats. He has to gauge and understand the underlying current in respect to various aspects of the merged organizations. Primarily, he needs to decide on the financial strategy, keeping in mind the following aspects of the M&A:
- Business process
In this article, we will look at the function of consolidation and reporting of financial books after an M&A.
According to Wikipedia, Consolidated financial statements are the "Financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent company and its subsidiaries are presented as those of a single economic entity".
In simple words, two entities (Parent and Subsidiary) need to have a single financial report once they merge. This may sound simple, but in the real world, it is full of challenges. Let us analyze the challenges in the context of the three aspects mentioned above:
The processes of the two organizations have to be aligned to enable reporting of consolidated numbers. Some relevant factors are:
Changes in accounting policies: The subsidiary may be following different accounting standards. For example, revenue recognition, depreciation or amortization may be different.
Local GAAP vs US GAAP: Subsidiary may be reporting in local GAAP, whereas the parent company may need the subsidiary to report in US GAAP.
Different fiscal calendar: Subsidiary’s fiscal calendar may be different from the parent company’s calendar. For example, most companies in India follow April – March calendar, whereas in USA, the fiscal calendar is different. Thus to consolidate, subsidiary’s calendar has to be realigned.
Taking care of the human/cultural aspects of the parent and the subsidiary is crucial for M&A success. The moment the M&A announcement is made, job loss fear sets in. People become worried and sometimes, due to cultural differences, talented resources leave the subsidiary company. A CFO needs to ensure that there is no knowledge gap during financial consolidation. A few essential action items for the CFO are:
- Identification of key resources required for consolidation
- Release bandwidth of the finance team to focus on M&A activities. Key resources need to interact with subsidiary resources to allay job loss fear and get the necessary support for consolidation
- Identify differences in business practices and take corrective actions to avoid any knowledge gaps.
System integration is a key priority with organizations wanting to integrate both companies’ systems as soon as possible to start leveraging cost benefits. One of the key decisions is to opt between Single ERP across the organization versus Multiple ERP i.e. different ERPs and their consolidation with a specialized tool.
Let us understand the pros and cons for these two options:
Single ERP – Advantages
- Single Chart of Accounts leads to faster consolidation
- Uniform implementation of business policies
- Centralized control
- Reduction in cost of maintaining multiple systems
- Better tracking of records
- Reduction in issues related to inter-company transactions
Single ERP – Disadvantages
- Requires huge effort in standardization of business processes
- Initial management support required is very high
- Difficult to implement in short duration of time
- Difficult to implement, if the subsidiary already has multiple ERPs
Multiple ERP – Advantages
- Easier to implement as consolidation can be done through mapping tables of Chart of Accounts
- Reduction in overall implementation time
Multiple ERP – Disadvantages
- Overall cost is higher than single ERP in the long run
- Decentralization of control
- Different business processes for the same type of activity
It is difficult to decide whether the combined entity should move to single ERP or let the subsidiary maintain their own system. As a CFO, one has to understand the political and cultural aspects of the two organizations before taking the call.
The roadmap to financial consolidation with multiple ERPs
Based on our experience working with many large organizations, we have found that adoption of multiple ERP and a specialized tool for consolidation is more common than single ERP. The main reason for this option is the time and effort required for standardization of business processes. We recommend the following approach for multiple ERP adoption:
- Define common Chart of Accounts for both entities. If the subsidiary already has multiple ERPs, and is using a specialized tool for their consolidation, the process may become complicated due to multi-level consolidation.
- Identify different accounting policies like revenue recognition, lease accounting etc. and create an approach to manage this.
- Create common calendar across the organizations.
- Create multiple mappings to load data from source Trial Balance to consolidated Trial Balance.
- Map all inter-company transactions and generate inter-company elimination reports to close all reconciliations gaps. Train users on the new tool. This is a very important aspect as most of the implementations fail due to adoption issues. Right set of training and management support always lead to better adoption.