Corporate Governance through Consolidation

Governance through Consolidated Financial
Statements

www.consolidationofaccounts.com Presentation by Dr Kalpesh Parikh
Automating the CFS……….. CA Sandesh Mundra

Structure of Talk
• Governance
• Concepts of Consolidation
• Transforming Consolidated Financials as
Governance Tool
• Questions


Objective of my ‘Talk’
• To Sensitize towards role of financial
community in Governance.
• To bring concepts of BI,DW,DM in perspective
& progress toward value addition
• An initiative is overdue for Automation of BI
• Application of Decision Support System &
prospective thinking


Governance


What is Governance
Objective of Corporate (Company or Group)
Predictability to stack holders

How to Achieve:
* Microscope *Telescope * Combination
* Combination Sequence
 Microscope on top of Telescope
 Telescope on Microscope

GRC (Governance, Risk and Compliance) - Superset Domain

• Oxford English Dictionary defines “Governance” as the act, Manner, fact or
function of governing, sway, control
• The word has Latin origins that suggest the notion of ‘steering’. It deals with the
processes and systems by which an organization or society operates.


What is Governance
Governance
Governance relates to decisions that define expectations, grant
power or verify performance. Needs setup to administer these
processes and systems

Management
The act of getting people together to accomplish desired goals.
Management comprises planning, organizing, leading or directing
and controlling means the act of getting people together to
accomplish desired goals.


What is Corporate Governance
Corporate governance is the set of processes,
customs, policies, law and institutions affecting the
way a corporation is directed, administered or
controlled.

A system of checks and balances between the board,
management and investors to produce an efficiently
functioning corporation, ideally geared to produce
long-term value

The Cadbury Committee report defines it as “the
system by which companies are directed and
controlled”.

It is a system of structuring, operating and controlling a
company with a view to achieve long term strategic goals to
satisfy shareholders, creditors, employees, customers and
suppliers, and complying with the legal and regulatory
requirements, apart from meeting environmental and local
community needs.

An internal system encompassing policies, processes and
people, which serves the needs of shareholders and other
stakeholders, by directing and controlling management
activities with good business savvy, objectivity and integrity.


• “Corporate governance is the system by which companies are directed and
managed. It influence how the objectives of the company are set and
achieved, how risk is monitored and assessed, and how performance is
optimized.”

•“Good corporate governance structures encourage companies to create value
(through entrepreneurism, innovation, development and exploration) and
provide accountability and control systems commensurate with the risk
involved.”

•Corporate governance is as much about systems, procedures and policies as
it is about culture, values and ethics

• It embraces risk management and compliance

• Good governance leads to better accountability


Why Corporate Governance
"enhancement of the long-term
shareholders value while at the same time
protecting the interests of other
stakeholders."

CORPORATE GOVERNANCE is needed to
create a corporate culture of
consciousness, transparency and openness.
It refers to combination of laws, rules,
regulations, procedures and voluntary
practices to enable the companies to
maximize the shareholders long-term value.
It should lead to increasing customer
satisfaction, shareholder value and wealth.”

Level of Corporate Governance
• Commitment, policy, board responsibilities,
STRUCTURAL
continuous improvement
ELEMENTS

•Identification of issues, operating
procedures, breaches and complaints, record
OPERATIONAL
keeping, internal reporting
ELEMENTS

•Education and training, visibility and
MAINTENANCE communication, monitoring and assessment,
ELEMENTS review, liaison


Conceptualizing Corporate Governance
Performance
Process Standard
Policies Efficiency
Effectiveness

Corporate Culture
Predictabilit
Consciousness Internal System y

Disclosure Controlling
Transparency Operating
Objectivity
Openness Structuring
Integrity
Accountability

Difference between
Corporate Governance &
Management
CORPORATE CORPORATE
GOVERNANCE MANAGEMENT

External Focus Internal focus
Governance
Governance assumes Management
an open system assumes a closed
system
Governan Strategy-oriented Task oriented
ce
Management
Concerned with Concerned with
where the getting the company
Company is going there


Concepts of
Consolidation


• Basics on Consolidation
– How did the concept emerge - Enron
– Legal Footing
– The process as per AS – different modes of consolidation
– Definition of Control
– Global perception on CFS
• Complex group Structures
• Markets and CFS – Value relevance
• CFS challenges
• Inference


Kreuger Crash of the early 1930s.


Enron Scandal made headlines…..

“off–balance sheet” partnerships that hid billions of
dollars of liabilities.

Enron used about 500 such SPEs and thousands of
other questionable partnerships


18
CA Sandesh Mundra,

Indian Scenario
• India - Standalone & CFS (From 2001)
• Only CFS – No? (Only US/UK)
• No Guidance in Companies Act
• SEBI Compliance
• Income tax – No recognition
• FDI - US $ 154 billion in 07-08


Indian Scenario
• 1,490 BSE companies have subsidiaries out of 5732
• 13.8 per cent have not provided CFS
• CFS on annual basis
• Option to publish quarterly
• Reading the profits


Comparison
Name Revenue Revenue Profit Profit
standalone Consolidated Standalone Consolidated
IRB Infra 267 cr 2438 cr 90 cr 454 cr
Shopper’s 12 cr -1.5 cr
Stop


Reporting Entity

• Identifying the boundary
• the economic activities in single / multiple
entities
• CFS vs Standalone - HO vs Branch
• Dividend and Taxes


Value Relevance for Markets


Legal Eye
• Mandatory for Listed entities as per Listing
Agreement but no mention in the Companies
Act
• Proposed in the new Companies Bill, 2011,


New Companies Bill 2011
Financial statements
• Section 129 - If the company has one or more
subsidiary companies, associate companies or
joint ventures, the financial statements of
these companies and joint ventures will have
to be consolidated and these consolidated
financial statements will also be required to
be placed before the General Meeting.


Bird’s eye view…..


The Journey ….


Complex structures


Evolution of the definition of “Control”

 More than 50% in nominal value of shares
 More than 50% in voting rights
 More than 50% in voting rights or control of
composition of BOD
 Consideration of potential voting rights for calculation
of 50%
 Power to govern operating and financial policies of the
entity
 Special Purpose Entities


Challenges in Consolidation:

• Multi Currency
• Various methods of consolidation
• Various Accounting Standards (AS, IFRS, etc.)
• Various types of entities: Branch, Partnership firm,
Private Limited companies, Limited companies
• Various Relationships in consolidation: Subsidiaries,
Joint Venture, Associates, etc
• Out of books effects – Goodwill / Minority


Important Definitions:-

Consolidated financial statements are the financial statements of a
group presented as those of a single economic entity.

Control is the power to govern the financial and operating policies of
an entity so as to obtain benefits from its activities.

Non-controlling interest is the equity in a subsidiary not attributable,
directly or indirectly, to a parent.

A subsidiary is an entity, including an unincorporated entity such as a
partnership, that is controlled by another entity (known as the parent).


Consolidation Process

Trial
Balances -
Alignment

Balance
Sheet
Consolidation
Profit and
Loss
Account

Cash Flow


Critical issues
• Changes in Stake
• Changes in Relationship
• Accounting Policy Adjustment and the impact
on Minority and Goodwill
• Upstream and Downstream transactions
• Cash Flow Statement
• Equity Accounting vs. Proportionate
• Deferred Tax Accounting

Maintenance of Two books of
Accounts
• Standalone books of Subsidiary at
carrying values
• Fair Value Books for the purposes of
consolidation.


Current Scenario
• Time and Repetitions
• Staff Deployment
• Human Dependency
• Lack of Reliability
• Bulky Data
• Decentralised Working not possible

So a lot of time is spent on compliance rather than
inference ?

Transforming
Consolidated Financials
as Governance Tool


A Journey of Preparation of
Walkthrough results is

Process is Manual cum office automation tool oriented

Knowledge of financial team is quite low of this Domain

Control Structure is hardly visible

Accuracy and Transparency is Person Dependent
(‘Worship the Hero’, CMM-SEI-Level 0)


Perspective of Consolidated Financials
• Rule Engine to remove ‘Fat’ (Objective Perspective)
• Compliance (Operational Perspective)
• Decision support tool
 Govt. (How Corporate Behave in Structuring)
 Corporate group (MIS)
• Business Intelligence (inside out -Beyond Transaction
Processing)
 Analytics
 Data Warehousing & Mining


Inference (BI - Analytics)

• Key Performance Indicators
 Analysis of Indicators
 Behavior Pattern
 Vertical Specific Standards
 Establish Benchmark


Consolidated Financial Cockpit


Automation Status
• 1980’s of books A/c stage for financial
consolidation


#9

Automation – Change in Orientation
• Quick availability through automation

• BI perspective compromises
– Trade Off - Time Vs Accuracies

• Technology Pace – Cloud and BYOD


Challenges of Consolidated Financial
Automation
• Base
– Rule, Interpretation, Precedence

• Complexity has never been issue – Clarity is the Issue

• Technology
– Heterogeneous Technology
• Different Hardware and Software in same Group

• Dynamics of Changes


can create
Impact on Governance

• Decisions based on pattern
(Informed Decision)
• Decision for processes
• Decision for Policy and Priorities


Contact Details
Aarna Soft Solutions Private Limited

Consoxle – Automating the Consolidated Financial Statements
Email: info@aarnasoft.net
Mobile: +91 9426024975

Web: www.consolidationofaccounts.com

Thank You !

Corporate Governance through Consolidation

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