Case Studies: Introduction of consolidation processes for a fashion group

Our client is a manufacturer, wholesaler and retailer of fashion clothing. The Group operates in the EU and the Far East. The management team acquired the business from a major UK retailer in 2005. The Group has 25 subsidiaries across these regions and also has a complex ownership and finance structure (US based). Reporting was under International Financial Reporting Standards (IFRS).

Staff turnover had been high and no workable process was in place to enable consolidated or local statutory financial statements to be prepared.

In October 2006, Paul Pascan was appointed by the client to investigate the current (partial) processes, to examine the complex acquisition and debt documentation and to introduce formal procedures to perform and control the consolidation process and the production of consolidated and subsidiary financial statements.

Paul conducted a thorough review of the accounting processes including a step back to the initial acquisition where a complex structure and a pre-sale dividend extracted by the previous owner had not been correctly dealt with, nor had the acquisition values of assets and liabilities been correctly identified.

The first step was to extract all current information available by individual company. Ledgers were examined for completeness and reconciled to prior-period financial statements. The ‘correct’ acquisition journals and ‘dividend flow’ journals were posted (removing the old incorrect entries) and the intra-group trading and balances corrected and reconciled. This ensured that a stable base existed for the preparation of both management and statutory accounts.

A consolidation data collection template was created for each subsidiary and for the acquisition. This was designed to collect and collate all financial and relevant contractual information.

Reconciled data was used to prepare the necessary IFRS financial statements for 2006 and 2007, supported by the individual template for each company. These were provided to the auditor for examination and comment. For convenience, UK accounts were prepared under UK GAAP and adjusted to IFRS for the purposes of the consolidation.

Individual company information was pre-prepared in Excel and reused for a structured consolidation model through six sub-groups, automatically picking up currency adjustments. Each sub-group had an appropriate ‘eliminations’ template to deal with group trading, group balances, group statistics and fair-value/goodwill adjustments from acquisition.

This process was strictly controlled and culminated in a consolidation model providing support for the consolidated financial statements which were prepared by us in Word. This arrangement also enabled the Top-4 audit firm to grasp the group structure and key issues.

Paul continues to provide support to the Group, in its reorganised structure, through FD Solutions.