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Blog Series - Consolidation

What is the Difference between Legal & Management Consolidation - Part II?

Legal Consolidation

One of our Textiles Client and  wanted to consolidate their various companies one Consolidation Group – *Super Textile Group of Companies

  • Super Textiles - Holding
  • Subsid1 Textiles – Subsidiary
  • Assoc1 Textiles – Associates
  • ….

*Names of companies are indicative, not real names.

All these Entities / Companies actual exist in MCA – Ministry of Corporate Affairs (or in your country the relevant Legal body), so these are Legal Entities and the client wanted to see the Consolidated Financial Statements of Super Textiles Group of Companies. The statutory requirement of combining the financial statements a is called Legal Consolidation / Consolidation of Financial Statements and it follows the Accounting standards as per Local GAAP or IFRS etc.

What is done in Legal Consolidation?

  • We combine the Balance Sheet, P&L / Income Statement and Cash Flow Statements to get the Consolidated Reporting.
  • Intercompany Receivables & Payables is eliminated (transactions are removed in the consolidated statements and net balance sits in the Reconciliation Account) in the Balance Sheet.
  • Intercompany Sales & Purchases are eliminated from the Profit & Loss / Income Statement to ensure there are no inflated sales / purchases happening between the group companies.
  • Goodwill / Badwill is calculated during the consolidation process based on difference between Investment of Holding company versus the Share Capital of Subsidiary being purchased at a premium or discount. Goodwill is takent to Balance Sheet and Badwill / Negative Goodwill is generally adjusted in the Income Statement.
  • Minority / Non-Controlling Interest is Calculated for the portion of Equity of the Subsidiary owned by external parties (not by the holding company)
  • Relevant Accounting Standards

How do we setup Legal Consolidation / Prepare Consolidated Financial Statements using SAP Tools like SAP BPC or S/4 Hana Group Reporting?

  • Setup the Consolidation Master Data pertaining to 
    • Legal Entities
    • Partner Entities
    • Chart of Accounts
    • Currencies
    • Audit / Document Types
  • Setup Consolidation Methods to identify the types of Legal Entities / Companies (numbers are not fixed you can define your own method code)
    • 100 Holding
    • 101 Subsidiary
    • 20 Associates
    • 50 Joint Ventures
  • Setup the Consolidation Group / Ownership Structure and maintain the ownership percentages e.g. Holding Company H Own 90% in the subsidiary S. So, the same has to be captured in say Consolidation Group
    • CG1 - EUR
      • H 100% Holding EUR
      • S 90%   Subsidiary USD
      • A 30% Associate EUR
  • Perform Balance Carry Forward to bring in opening balances using closing balance of last year
  • Load the Closing Balances for P&L and Balance Sheet & Movements on Balance Sheet like Additions/ Reduction / Transfers etc. on fixed assets.
  • Perform Currency Translation (convert the standalone local currencies balances to group currency)
  • Setup the reclassification / elimination Rules to perform
    • Consolidation of Investment (COI)
      • Eliminate Investment of Holding & Share Capital of Subsidiary
      • Calculate Minority / Non-Controlling Interest
      • Calculate Goodwill / Capital Reserve
    • Intercompany Elimination
      • Eliminate Intercompany Receivables vs Intercompany Payables
      • Eliminate Intercompany Sales & Intercompany Purchases
      • Intercompany Profit Elimination (in case of companies having value chain)
  • Prepare the Consolidated Financial Statements
    • Consolidated Balance Sheet
    • Consolidated P&L / Income Statement
    • Consolidated Cash Flow Statement
    • Consolidated Changes in Equity

 

 

Then What is Management Consolidation?

As you saw above that Legal Consolidation had focused on Legal / Statutory requirements of consolidation of financial statements (it is mandatory for companies exercising control over subsidiaries etc. by virtue of their investments).

But Management Consolidation / Managerial Consolidation does something similar jus that it is not mandatory or binding to the company. It is more from the Internal Control / Internal Management Reporting perspective. In addition, the Consolidation of Investment is not key area / required area for Management Consolidation. Focus is more to:

  • Eliminate Inter-Unit Transactions
    • The Legal Entity structure is not the same in case of Management consolidation. Generally, we perform Management Consolidation to know Segment / Division wise P&L or Balance Sheet. We define the Group Structure in such as way that it can help in identification and removal of intra-segment transactions irrespective of the fact they happen in same company or different.

 

What does that mean? Let’s take an example:

A Group Company having Management Consolidation Group Structure with following segments

  • Trucks
  • Bus
  • Cars

And F 3 Legal Entities

  • E1 – Smart Wagon Europe
  • E2 – Smart Wagon US
  • E3 – Smart Wagon UK

We get following pair of Entities for Management Consolidation based on the table below:

 

Bus

Truck

Cars

E1

Yes

Yes

 

E2

 

Yes

Yes

E3

Yes

 

Yes

 

Management Consolidation entities

  • E1_BUS
  • E1_TRUCK
  • E2_TRUCK
  • E2_CARS
  • E3_BUS
  • E3_CARS

Now Assume an Intra Segment Sales happen between

Gal Account

CONSOL Unit

Partner Unit

Time

Amount

IC Sales

E1_BUS

E3_BUS

202001

1000

 

This will inflate the sales numbers of Segment BUS. So, we will have to eliminate such intra-segment transactions for BUS Segment.

 

The Purpose of Management Consolidation is to:

  • Analyse the performance of different segments of the company / Group Companies
  • Analyse the Profitability by BU / Segment
  • Apply Guidelines of Internal Management for Consolidation of Business Units / Segments & Generate Financial Statements of Consolidation Unit.
  • In certain cases, it can be pure roll up of entities to Segment where inter-segment scenarios are not much and Reporting can be simply done just by Entity hierarchy rollup.
  • In many cases the Entities Hierarchy is defined differently for Management Consolidation compared to Legal Consolidation (most of the time)
  • Some additional Consolidation scenarios like Zakat Calculation in Middle East uses Management Consolidation approach
  • A travel company having offices in multiple geography wants to consolidate its unit by segment, these offices are not created sometimes as legal entity, so Legal Consolidation might not be fit.
  • In addition, in Managerial Consolidation we get scenarios to perform Allocations of Revenue / Costs etc. where shared service is being used from a partner entity. E.g. a Textile Company having a subsidiary for Paper Manufacturing & Power Generation. Power Unit is selling to both Textiles & Paper and also to 3rd Party Companies.
  • Most common use case is getting Profitability by Segment (Typically Profit Center object is used for that) and Compcode + Profit Center is used to define the Consolidation Unit for Managerial Consolidation.

To be continued …..

 

Reach out to us admin@trijotech.com for newsletters and our demo sessions.

 

 

Comparison of Consolidation Tools from SAP - Part I

SAP Customers are always curious about which SAP Consolidation Tool is the perfect fit for their Organizational needs. In my last 15+ years with various SAP Tools and in particular consolidation tools and projects I have come across following :

  • SAP ECCS
  • SAP BCS
  • SAP BPC Standard / Classic
  • SAP BPC Embedded
  • SAP BPC Optimized (In S/4 Hana)
  • SAP BO FC
  • SAP Disclosure Management
  • RTC - Real Time Consolidation (in S/4 Hana)
  • Group Reporting (in S/4 Hana)

SAP ECCS vs Group Reporting

The most initial tool for Consolidation from SAP  is SAP ECCS - can say it was quite robust and well built and stable tool. The Customers who were using it quite have been quite happy with it. It has got all the nice features like Consolidation Monitor, easy to configure, all standard consolidation options for Inter-company & Equity Consolidations. In addition it has got a really sturdy Management Consolidation options. Going by its good design, no wonder SAP kept most of the features in Group Reporting tool. Group Reporting is ECCS on nitro with smart UI in fiori and Reporting (using ABAP Core Data Services) works like charm. So if you are existing ECCS customer - Group Reporting is a great fit for you.

SAP BCS

SAP BCS using similar concepts from ECCS but more BW driven . It is having similar feature as ECCS. With Hana there is no real need now to have BCS on standalone.There has been news about will bring back strong version of BCS again , those who have been SAP BCS fan you can happy with that news :)

SAP BPC

SAP BPC standard / classic came from outlooksoft so it was not fully integrated to SAP BW initially . It got more integrated into SAP landscape from SAP BPC 10.1 NW version. Though some customers also implemented SAP BPC MS version and were quite happy with that. BPC Consolidation is quite open tool, easy configure interface to design your elimination rules, very easy reporting UI, Business Process Flows, flexible Ownership manager, Journals and intuitive consolidation monitor.

SAP BPC Embedded is different than standard as it is more BW driven > which means it is more IT driven. In BPC classic / standard you create models / dimension from front end and objects are created in BW background automatically. Whereas in case of BPC Embedded you first setup your architecture in BW backend and then define the Environment & Models in BPC Web front end.

comparison - Most of the functionalities are similar between BPC Classic & Embedded except for their architecture. Main benefit of embedded is that there are less no. of data load interfaces. Main benefit of classic is that it is very fast to build, test & use and it can be even managed by business users rather than IT.

SAP BPC Optimized - not really much different with embedded, just that this BPC version sits inside SAP S/4 Hana in embedded BW. Only version available right now is BPC 10.1 NW optimized as BW/4 Hana is not supported inside S/4 hana and neither there is future roadmap it seems.

SAP BO FC 

The major difference with BPC with BO FC is that BO FC is only for Consolidation but not relevant for Planning purposes while BPC extensively supports planning. BO FC is also quite stable and business driven tool like BPC classic and equity consolidation is supported quite well in this tool. If you are a BO FC customer no need to change anything just continue :)

SAP Disclosure Management

SAP Disclosure Management is complentary tool to SAP BPC to help you with Notes to Account. Though not widely used, it is quite a useful tool if you are looking for a solution to capture your Notes to Accounts, though data will ultimately come from BPC in most of the cases. Alternative solution to Disclosure Management is you can explore SAP BPC classic Word Add-in , or just use EPM Reporting for Classic or SAP Excel Add-in Analysis for capturing Notes to Accounts.

SAP RTC - Real Time Consolidation

SAP RTC is more of BPC Embedded or Classic sort of Tool, functionalities are 95% of BPC Embedded, only difference is more real time as data is sourced using Hana Views on top of ACDOCA and new Consolidation Tool table ACDOCC where LC, Translation & Elimination entries are written to. It is setup inside S/4 Hana in embedded BW so no additional server required which cuts your maintenance cost. Though I would recommend to use BPC Embedded as it doesn't work too differently than BPC Embedded. BPC Embedded is more stable now in latest release of BPC 11.0/11.1 NW. Another option could be to use Group Reporting.

SAP S/4 Hana Group Reporting

This is most latest flavour in the consolidation area from SAP and had some challenges till S/4 Hana 1709, but quite stable in S/4 Hana 1809. There is a version also available for cloud customers which is also quite stable. As mentioned earlier, it uses the real time feature of reading data from universal journal ACDOCA for actuals and post the consolidation entries in ACDOCU table (new consolidation table for group reporting). The Hana optimized ABAP Core Data Services are used for Reporting . The solution is using most of the good features of ECCS so existing ECCS customers will definitely like this tool.

Wish this makes your life easy in tool selection . Reach out to us  for any kind of tools selection, tool audit and sap guidance. : admin@trijotech.com

Disclaimer : All the opinions are solely for information purposes and the author doesn't recommend or reject any tools . It should be done after your own due diligence.

..To-be continued in part II

 

 

 

 

 

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