Crack the code: How unified nominal codes simplify multi-company financial reporting?

July 12, 2024 2 min read

Let’s look at examples of Multi-Company and Merger Context

Scenario

A parent company owns multiple subsidiaries, each using its chart of accounts with different naming nominal code conventions for similar accounts. For instance, Subsidiary A refers to its cash account as “Cash in Hand,” while Subsidiary B calls it “Operating Cash.”

Problem Without Nominal Codes

When the parent company attempts to consolidate the financial statements of these subsidiaries, auditors, and M&A analysts may struggle to reconcile accounts due to the varying names. This can lead to errors, misinterpretations, and increased time spent on the consolidation process.

Solution with Nominal Codes

By implementing a unified nominal code structure across all subsidiaries, each cash account could be assigned a specific nominal code (e.g., 1001). Regardless of what the account is named in each subsidiary’s internal system, the nominal code 1001 will consistently represent cash. During consolidation, auditors and analysts can rely on these codes to quickly and accurately merge balance sheets and profit & loss statements.

Key Benefits of Nominal Codes

Consistency: Nominal codes provide a consistent reference for similar accounts across different entities, reducing confusion.

Efficiency: The consolidation process becomes more efficient as there is no need to map different account names to a common structure manually.

Accuracy: Reduces the risk of errors in financial reporting, ensuring accurate and reliable consolidated financial statements.

Clarity: Auditors and M&A analysts can easily understand and verify the financial data, facilitating smoother audits and due diligence processes.

Implementing a well-structured nominal code system is particularly beneficial in multi-company environments and during mergers and acquisitions, providing a standardized framework that enhances clarity, efficiency, and accuracy in financial reporting.

Let’s take a closer look at Consolidated Income Statement for XYZ Holdings

For the Year Ended December 31, 2024

Nominal Code	Description	Parent Company	Subsidiary A	Subsidiary B	Consolidated Total (USD)
Revenue
4001	Sales – Electronics	200,000	150,000	100,000	450,000
4002	Sales – Clothing	100,000	80,000	60,000	240,000
4003	Sales – Groceries	50,000	40,000	30,000	120,000
	Total Revenue	350,000	270,000	190,000	810,000

Cost of Goods Sold (COGS)
5001	COGS – Electronics	140,000	105,000	70,000	315,000
5002	COGS – Clothing	70,000	56,000	42,000	168,000
5003	COGS – Groceries	35,000	28,000	21,000	84,000
	Total COGS	245,000	189,000	133,000	567,000

Gross Profit		105,000	81,000	57,000	243,000

Operating Expenses
6001	Salaries and Wages	40,000	32,000	24,000	96,000
6002	Rent	20,000	16,000	12,000	48,000
6003	Utilities	10,000	8,000	6,000	24,000
6004	Marketing	15,000	12,000	9,000	36,000

This consolidated income statement shows how using a unified nominal code structure across a parent company and its subsidiaries helps easily aggregate financial data for clear and accurate reporting.