When a parent company has a subsidiary in India, consolidating the financial books from the Indian subsidiary with the parent company’s accounts is an essential process. However, this can become complicated due to differing fiscal year calendars and varying accounting standards between countries. This article discusses the steps involved in consolidating the books of an Indian subsidiary with a parent company, particularly when they operate under different financial year periods.
Understanding the Difference in Fiscal Years
One of the first challenges in consolidating the financial accounts of a parent company and its Indian subsidiary is the difference in fiscal years. For instance:
- US Fiscal Year: Many countries, including the United States, follow the calendar year for their financial year, running from January to December.
- India Fiscal Year: In contrast, India follows a April to March fiscal year.
This discrepancy in fiscal years requires that businesses carefully plan when finalizing accounts to ensure smooth consolidation.
Step 1: Finalize the Subsidiary’s Accounts
The first step in consolidating the Indian subsidiary’s books with the parent company is to finalize the subsidiary's accounts. Since India follows an April to March fiscal year, the Indian subsidiary’s books should be closed by March 31st of every year. The subsidiary must complete all its accounting records, including invoices, transactions, and other business operations for the period, and ensure compliance with local regulations.
This process may include:
- Reconciling accounts: Ensuring that all bank accounts, expenses, revenue, and tax liabilities are correctly recorded and reconciled.
- Tax filings: Completing any necessary tax filings for the financial year in India.
- Audit: If required, having the books audited in accordance with Indian regulations.
Step 2: Freeze the Books
Once the accounts for the Indian subsidiary are finalized, it is important to freeze the books. Freezing the books means ensuring that no further changes will be made to the records after the end of the financial year. This helps prevent any discrepancies when consolidating with the parent company’s accounts, which may operate under a different fiscal year.
Freezing the books of accounts at the end of March will allow the subsidiary to move forward with compiling its financial data for consolidation with the parent company.
Step 3: Adjust for Currency Conversion
If the parent company is located in a country with a different currency, the next step is to account for currency conversion. The Indian subsidiary will typically report its financials in Indian Rupees (INR), while the parent company may use a different currency (e.g., US Dollars, Euros). This necessitates the use of appropriate exchange rates to convert the subsidiary’s financial figures into the parent company’s reporting currency.
The currency conversion process may involve:
- Using average exchange rates for income and expenses over the reporting period.
- Using the closing exchange rate on the last day of the financial year for balance sheet items such as assets and liabilities.
It is crucial to use consistent exchange rates for reporting to ensure accuracy in the consolidated financial statements.
Step 4: Eliminate Intercompany Transactions
Another crucial aspect of consolidation is the elimination of intercompany transactions. Parent companies and subsidiaries often transact with each other, whether through loans, sales, or services. These intercompany transactions must be eliminated during consolidation to prevent double-counting of revenue or expenses.
For example:
- Intercompany sales: If the parent company has sold goods or services to the Indian subsidiary, the revenue and corresponding expenses related to these sales should be removed.
- Intercompany loans: If the subsidiary has received loans from the parent company, these loans and interest payments should be excluded from the consolidation.
The goal is to avoid inflating the consolidated revenue or liabilities by removing internal transactions that do not represent external business dealings.
Step 5: Consolidate the Financial Statements
Once the subsidiary’s books are frozen, currency adjustments are made, and intercompany transactions are eliminated, the next step is to consolidate the financial statements. This process involves combining the subsidiary’s financial records with the parent company’s accounts to create a unified set of financial statements.
- Income statement: Combine the revenues, expenses, and profits of the parent and subsidiary, making sure to exclude intercompany sales and expenses.
- Balance sheet: Add the assets and liabilities of the subsidiary to the parent company’s balance sheet, while excluding intercompany balances.
- Cash flow statement: Consolidate the cash flows of both entities, ensuring intercompany cash transactions are excluded.
The consolidation process must adhere to both local accounting standards (in India) and international accounting standards (such as IFRS or US GAAP) to ensure compliance.
Step 6: Reporting and Filing
Once the financial statements are consolidated, the next step is to report the consolidated results to the parent company’s stakeholders. For a US-based parent company, this means filing the financial statements with the Securities and Exchange Commission (SEC) or any other relevant regulatory body.
The consolidated reports are also used for tax filings at the parent company level. Parent companies often need to submit consolidated financial statements to their tax authorities to report the entire group’s income, deductions, and tax obligations.
Conclusion
Consolidating the books of an Indian subsidiary with its parent company may seem complicated due to differing fiscal years and regulatory requirements. However, by following a systematic approach — finalizing accounts, freezing the books, adjusting for currency conversions, eliminating intercompany transactions, and consolidating financial statements — the process can be streamlined.
Having a clear understanding of both local and international accounting practices, and using the right tools and professionals to assist with the consolidation process, will ensure accurate and compliant reporting at the parent company level.
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