SEM-BCS and IFRS - Part III

[Former Member]

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Hierarchy of organizational units in (internal) management

 

The advancement of uniform internal and external reporting and reference of IFRS standards to management approach in documentation and valuation questions requires the enterprise to pay attention to internal management. Internally, the legal structure is less prominent than efficiency and effectiveness of business processes. The enterprise is structured as a collection of business processes that successively build up higher level structures up to segments as per IFRS. When internal processes are analyzed the decision is made as to from which level a consolidated view is required. Only from that level should the internal hierarchy be managed. The smaller the internal hierarchy, the more comprehensive are relationships among the consolidation units. The number of business processes with additional detail data reported increases as well. When, from the point of view of internal accounting, the lower levels carry only the basic consolidation tasks, such a configuration leads to fully harmonized reporting in which more complex tasks for legal consolidation also require more detailed configuration. This also leads to proliferation of zebra companies. The flexibility of internal management accounting and comparatively higher requirements for legal accounting call for finding a common ground to satisfy both goals of accounting.

One example can be a hierarchy with internal units for (lines of business) Profit Centers. The subordinate unit of PC has a structure of attributes that are offered for reporting...

In addition to value adding processes we need to prove how the geographical breakdown has an impact on the structure. If the geographies are reflected they need to be taken into consideration as a characteristic. Many times, however, this requirement is fulfilled with help of attributes and not within the hierarchy.

The consolidated statements are prepared at the level of consolidation units. Depending on complexity of the enterprise there can be multiple levels of consolidation units structured and grouped into the consolidation hierarchy. In utilizing the matrix functionality reports can be prepared from either legal or management perspective.

In the hierarchy structure characteristics reflect the system settings further used in consolidation preparation...

It's not necessary to define consolidation on each level of the enterprise hierarchy because SAP allows consolidation with tasks in a multistep simultaneous process...

In preparing the statements are then included all reported (and submitted) balances and consolidation tasks of predefined legal consolidation units that comprise the lower level entities. To ensure the proper task execution, configuration of consolidation unit combinations of legal entities and (lines of business) Profit Centers needs to take place.

The following input steps are required for configuration of consolidation units:

• Create the basic master data like description, language code, contact details, etc.

• Determine when the data is going to be consolidated for the first time.

• For the purposes of consolidated statements, all reported (and submitted) balances along with adjustments and corrections, need to be translated into one uniform currency - consolidation unit currency. The reporting currency is configured in permanent parameters and not in the specific consolidation area. In the consolidation area hierarchy structure it is possible to use different currencies at different nodes. So, it's basically possible to have one portion of enterprise using EUR when the whole enterprise is using USD…

• To prepare financial statements, it is necessary to establish the frequency of reporting. Externally, annual cycle and sometimes additionally quarterly reporting is required. For management purposes, the reporting frequency may be higher and the statements may be prepared on a monthly basis. Whether the cycle is annual, quarterly or monthly is determined by the configuration of consolidation area's consolidation type which divides time into intervals at the end of which accounting entries can be made. The consolidation type further determines other settings. In definition of consolidation unit's first consolidation date can be determined if consolidation takes place at the end of the period; the setting is "period end". The system interprets in this case the end of period interval depending on consolidation type. Please keep in mind that activation of accrued/deferred taxes should not be tied to this setting. In consolidation, units are configured independently from consolidation (frequency) intervals. Instead, the consolidation type is assigned to a task that is anchored in a sequence run during consolidation.

• By building the legal structure it is automatically determined which companies are included as a consolidation unit. The same is true for the management hierarchy structure. This assignment is independent from capital ownership relationships and accounting technique. The assignment to accounting techniques takes place in configuring of accounting techniques. The capital ownership relationships are configured in additional financial data (ownership percentages) of equity rollforward statements.

• For each consolidation unit we have to determine which investment capital data is relevant for the first and final consolidation. The basic accounting of the acquisition requires calculation of acquisition cost of the investment with the proportion of the newly valued own equity at the time of the acquisition of a subsidiary or division. According to IFRS 3.25 the acquisition date is the time when the actual control over the assets can be exerted along the financial and operating handling of the acquired business or when the business is transferred to the acquirer. When the control transfer is executed within one step then the date is that of exchange transaction. Attention must be paid to the unique differences in the share voting structure. The (control) dates are separated in a multistep acquisition in which the successive tranche dates are designated as dates of exchange transaction. IFRS 3.32 From the viewpoint of the controlling stake acquisition, identifiable assets and liabilities of the subsidiary and the goodwill are incorporated in the statements of the acquirer. The depreciable assets have to be depreciated over the new useful life from the viewpoint of the acquiring entity. For the profit and loss statement purposes the acquisition date is the starting point for the inclusion of revenues and expenses into the profit and loss statement of the enterprise IFRS 3.38. The revenues and expenses of the subsidiary earned and incurred up to the acquisition date, respectively are not included in the results of the parent. When the consolidation unit is incorporated in the consolidation group, we need to establish the date of the first consolidation, as of and for which the financial statements are prepared…When the acquisition takes place at the end of the reporting period, the checkmark of “First Cons at End of Period” (FCEP) needs to be set…The consolidation type determines what is interpreted as start of period and end of period…Please note that also the parent unit needs to have the checkmark set as well. This checkmark (FCEP) has further impact on the task of investment (capital) consolidation. For example, when the FCEP is checked along with “Subsequent consolidation”, the equity of subsidiary is included in that of the parent, as well as in the task of “Change to Consolidation Group.”…When a subsidiary is entirely divested, the basis of valuation at the time of the loss of control, determines the final consolidation. The same is true for partial sales of shares until the control can no longer be exercised. In that case a transitional consolidation according to equity method is recommended when substantial control per IAS 28 is exercised. The loss of control takes place when the parent unit cannot control its subsidiary directly or indirectly. Per IAS 27.21 it is clear that the loss of control does not have to be a direct result of the share sale. More often, it is related to the loss of effective command. The mere expectation of a sale or the starting of the sale process by identifying a buyer is not sufficient for the end consolidation to take place. With fulfillment of requirements of IFRS 5 a reclassification of assets and liabilities into “Held for Sale” needs to take place.

• As already mentioned, the checkmarks for the first and last consolidation are not set at the consolidation unit, but rather at the Consolidation Group level. As a result, the same consolidation unit can have different attributes in different Consolidation Groups. From the business point of view, such settings make sense only under very rare circumstances.

• In internal reorganizations, additional attributes are of relevance, but only available when a setting for “Change to Consolidation Group” is set at the Consolidation Group level: 1. First consolidation within the change of organizational structure 2. Organizational change number 3. Final consolidation within the change of organizational structure

• Consolidation Group is not a unit at which accounting entries can be booked. Whenever there is a requirement to make entries at the Consolidation Group level (e.g. for step consolidation or reciprocal eliminations) there can be your own (dummy) consolidation unit (so called delta nodes) set up. Such a consolidation unit is later entered into master data under the assigned end node. Do not try to reassign the consolidation unit that has already been assigned in the hierarchy. Make only such journal entries in that consolidation unit that you would also make in the consolidation group. We recommend that the same description is given to consolidation unit as is to the Consolidation Group. In addition, the functionality of assigned end nodes can for example be used for allocation of goodwill to business areas or segments according to IAS 36.