SEM-BCS and IFRS - Part II

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Master data

Permanent parameters

Before using consolidation for the first time, you need to configure variables for your configuration. The permanent parameters are valid for both customization in the workbench as well as for working in consolidation monitor and can be changed in both environments. Whenever you need to reuse the settings please save them. When the changes are not saved the settings are valid for the current session only. Parameters that should have values filled by the end users are determined in customization for consolidation area. The only mandatory parameters are version, fiscal year variant, fiscal year, and period.

Consolidation area

You need to configure the consolidation area for consolidation tasks to be executed. Consolidation area is a portion of data basis in which by including or excluding characteristics you can create characteristic bundles. By data deletion or populating individual characteristcs as per combination defined for the data basis you ensure compliance with specific reporting requirements. The well-known consolidation area has the value of 70.

Fiscal year and period

We select the fiscal year and period for which consolidated statements are prepared. From that moment for that fiscal year consolidated data is stored and consolidation tasks are executed. SAP also allows intrayear reporting for midyear, quarter, and monthly closes. When the requirement is only for the annual close then period 12 or the equivalent fiscal period is to be selected. As of that period, you can view and execute the consolidation tasks in the consolidation monitor
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Version

Versions are used for alternative consolidations tests according to changes in accounting methods for valuation and disclosure as well as externally determined changes like changes in foreign currency rates. Versions enable the following scenarios:

·    Separate consolidation and administration of different data categories, e.g. actual, plan,    budget, projection figures.

·    Simulations of consolidated data, e.g. impact of foreign exchange rate changes or impact of consolidation unit spinoffs on reported balances.

·    Restatements, i.e. using current methods for prior year data

In a consolidation unit you can have more than one characteristic with the role of version. When multiple characteristics are created, any subset can be selected for executing in the consolidation. For instance, when characteristics: accounting principles (0SX_ACCS) and data category (0SX_DCAT) are assigned the role of version in which accounting principles assume the values of IFRS and US GAAP and data category values of actuals and plan, the result is a version combination: e.g. actual and plan US GAAP and plan and actual IFRS.

Consolidation chart of accounts (FS Items)

To execute consolidation tasks one requires a uniform chart of accounts or rather Financial Statement Items. There can be multiple charts in the system to satisfy particular requirements, e.g. IFRS, statutory, or US GAAP or according to enterprise's management needs. A well-known chart 20 meets the requirements of IFRS.

Group currency

Creation and selection of a (reporting) group currency is mandatory for execution of consolidation tasks and preparation of financial statements. Consolidation area hierarchies allow a flexibility of unique custom currency reporting in which currency can be different in different nodes of the enterprise hierarchy.

Basics of master data administration

Master data are the possible values of characteristics. Those values are defined according to the needs of the enterprise and legal requirements of financial reporting. Administering master data is fundamental for any consolidation system and enhances functionality of such a system. Setting up an area for a combination of a consolidation unit and business area of management accounting structure has an impact on the depth of harmonization of internal and external accounting as well as on the requirements for consolidation tasks. Master data includes: consolidation units, consolidation chart of accounts and their subassignments. Master data maintenance plays a central role in consolidation according to SAP. Such maintenance can be both manual and automated through uploads. Master data forms its own hierarchy according to organizational needs and consolidation chart of accounts.

Consolidation units

Fundamentals

Consolidation units are the smallest entities which can be consolidated and reported on. Entities that report according to functional areas and not according to multilevel consolidated management requirements can use the legal entity as consolidation unit (classic consolidation). This is done through a setting of company in the role of consolidation unit.

It should be obvious that not only IFRS can be applied but also internal accounting policies have to be implemented in more complex company structures, especially when internal management accounting needs to be harmonized with external reporting needs within the matrix functionality. Thus, legally mandated accounting standards are tied with management accounting. Attention needs to be paid not only to legal subsidiaries in consolidation and valuation, but also in which segment or brand such a subsidiary or group of subsidiaries is to be classified. Collecting data and subsequent consolidation tasks are executed not only exclusively from a legal point of view, but also from assigning of assets and liabilities and costs and revenues in the internal structure of a reporting entity.  In order to implement such a design a company is viewed from two levels and spans across two dimensions.
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In definition of a matrix structure it's important to determine down to which level of detail management of shareholder value needs to be exercised. Our recommendation is not to make the structure too complex and opaque. Instead of utilizing Profit Centers and Profit Center Groups business areas can be used to build the matrix. This is not to mean that for internal audit (control) purposes Profit Centers should not be used for valuation. By selecting appropriate attributes such information can be obtained. In that case, however, it cannot be consolidated.

We also advise to set up a business area "Corporate" in addition to operating units. In such an area we can collect assets and liabilities that otherwise cannot be classified elsewhere. That area is also very important in capital investment consolidation. In configuration step of combination of consolidation units we assign which group companies with their subsidiaries operate in which business areas. We also need to assign one "corporate" unit to each company group.

Matrix functionality enables all reporting and consolidation data classified according to legal structure and according to business composition of an enterprise. All activities take place in the combination of company and the line of business. The main advantage lies in classifying assets according to external requirements and for management purposes based on the same underlying data. When applying so called zebra companies matrix reporting is even more pronounced. In classical consolidations companies could be assigned unequivocally to a consolidation area within consolidation hierarchy, but reporting for management or segmentation spreads across different elements of a level of the hierarchy.
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In a matrix model, each consolidation unit is formed by a tie of company and line of business. To configure that model the role of consolidation unit is assigned to both company and profit center characteristics. When more than one characteristic is in the role of consolidation unit, one of them needs to be the host for currency. According to IAS 21 the entity is obligated to convert the enterprise's functional currencies into the reporting currency. When the enterprise includes zebra companies, which have business units’ currencies converted using the modified end of period or average exchange rate then the line of business needs to be selected as the currency bearing unit. This selection becomes even more relevant when the reporting is not based on legal units, but when the line of business of a subsidiary spans different currency regions. In other cases, it is sufficient to select the reporting currency based on the location of the subsidiary.
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To implement the matrix functionality the following steps should be followed:

1.    Set up the hierarchy from the legal point of view
2.    Set up the hierarchy for consolidated reporting of units for management purposes
3.    Define nodes for the created matrix which show valid characteristics
4.    Define parameters for the consolidating units in consolidation areas.  Also define    consolidation method of each consolidation area.

Legal hierarchy of enterprise

Legal hierarchy of an enterprise can be created by customization of master data - company. This is the functionality for all legal entities that are included in financial reporting: the ultimate corporate parent, intermediate parents, subsidiaries, joint ventures, and affiliates. In this step, company does not get assigned one unique consolidation method as the latter can get assigned at different levels of hierarchy.

Setting up consolidation groups from the legal point of view is needed for the reporting entity. Within the hierarchy of consolidation groups, consolidation units are included in consolidation tasks for financial reporting.
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To reflect the enterprise structure in SEM consolidation it is not required to utilize the consolidation groups. Alternatively, consolidation group’s matrix can be utilized for management accounting as those groups follow the internal structure of an enterprise. By applying this approach the structure can be substantially slimmed down. The approach also has an impact on goodwill calculation in a multilevel proportionate capital consolidation since an intermediate parent company is determined by setting up a check mark for parent unit that is necessary for at least one consolidation unit.

When a division is acquired from another enterprise it is advisable to set the parent unit indicator not only at the highest level and thus arrive at a preconsolidated partial reporting entity. Rather, create individual companies and this way create for them a consolidation group.

One example of creating master data of consolidation unit is as follows:
1.    Each consolidation has a unique key identifier, e.g. prefix of 2 alphanumeric characters followed by 4 numeric characters.

2.    In consolidation master data set up fiscal year variant. That characteristic ties calendar year with fiscal year. The fiscal year variant determines how many ordinary and how many extraordinary periods are in fiscal year and how the system determines appropriate periods. The system also determines through fiscal year variants how input data is stored in reporting currency. The configured fiscal year variant is interpreted by the currency conversion and serves as a support for including reporting with shifted fiscal years. It has no impact on other consolidation functions like data format or upload or overall reporting of consolidation. That's why the fiscal year variant is assigned to the consolidation area, i.e. all period data is referring to the designated fiscal year variant of consolidation area.

3.    Assign fiscal year variant to each consolidation unit. Across consolidation group hierarchy all units must be assigned the same fiscal year variant.

In the tab for Business Partner, data is specified more narrowly. Here, legal address and contact details are provided. This data can be administered through consolidation area-BP solution. Additional information is provided in "Other Attributes" tab. It's important that this tab is used only for classical one-dimensional consolidation. The consolidation unit hierarchy can be kept flat by assigning attributes to units. By using attributes it's possible to book additional information for companies: for example, country codes in order to reflect local statutory requirements. This way, what had to be reflected in hierarchy, can now be done through attributes of a company. This way of setting up companies can only be used for field selections but not for consolidation.

Each company needs to have its domestic currency assigned. This is a currency that is used by the company in its business and the company's reported data, i.e. data of its financial statements and underlying financial books and records as provided to the consolidation system. Whenever the domestic currency differs from consolidation group currency a conversion needs to take place. The choice of conversion method relies on the concept of functional currency. The assignment of currency conversion method is not done in the master data but rather in the task of "currency translation".

In the consolidation according to SAP there is flexibility in how company is included in consolidation. In practice, the reported data is provided by either legal entities or by business areas. The assignment of data transfer process is not done in the company master data, but rather in the task of (reported and additional) data collection.  In the configuration of the task it can be determined whether it's specific to the individual consolidation unit or not.

Whenever accrued or deferred income tax assets or liabilities are to be booked the rate needs to be specified in the company.

The representation of the enterprise structure takes place according to reporting periods. In consolidation system the companies and legal consolidation groups are reporting according to period value set in configuration step of permanent parameter. The configured structure must reflect changes of the consolidation group over time (subsidiary acquisitions, divestitures, internal reorganizations). The validity of master data comes in handy when a division has been spun off and thus no more accounting entries can be made in its books. Outright deletion is not appropriate as there are entry data from prior periods. In case of time- or version-dependent characteristics, like hierarchy of consolidation units, the system adds a list of invalid values as per a given period and/or version. When a characteristic is defined in data basis as time- or version-dependent the system checks validity periods and processes only those that are valid as per values set in permanent parameters.