SEM-BCS and IFRS – Part VII
Basics of Booking
SAP consolidates reporting units’ balances via booking entries within the consolidated enterprise. On the one hand, adjustments and corrections are required for creating the enterprise’s balances and valuations. On the other hand, elimination entries are made for internal relationships like intercompany receivables and payables or capital equity investments. The following consolidation tasks result in entering journals in the system:
* Adjustments and corrections of submitted balances
* Enterprise-level journal entries
* Interim period eliminations
* Preparations for changes in Consolidation Groups
* Capital investment consolidations
Whereas adjustments and corrections must be entered manually due to their individual character, all other tasks listed above to a large extent can be automated. Therefore, a high level of automation is achieved for quick presentation of financial statements. To accommodate the automated entries FS items are necessary for reflecting internal enterprise business between entities as well as configuration of items to be netted against and of items for booking their net differences.
Selected aspects of Consolidation can be accomplished manually in addition to automated entries. For all booking entries documents are created. Those documents are evidence of changes of values in the database and at all times can serve as proof of how Consolidation balances have changed since the submission of the original data. The entries are stored in InfoProviders for totals items (totals database). In other words, tasks for correcting of submissions, adjustments, enterprise-level entries, etc. result in system entries and thus in carrying forward of balance totals in the relevant InfoProvider. Only the tasks of data collection, currency conversion, and bringing balances forward are resulting in no booking entries, but rather in copies of those balances in the totals section of InfoProvider.
Other aspect of the system is the parallel creation of manual entry documents for the previously mentioned tasks which had been stored in the InfoProvider. The stored records document the changes of values in the database and can be individually listed.
In SAP, manual entries can be reversed only via an equivalent opposite entry. With the entries created automatically you can determine that the prior booking run has been overwritten by the current run. Keep in mind that the reversal of the automated entries can only be made by repeating of the opposite Consolidation tasks. For that, the relevant configuration of the master data (Version Combination) is required.
With preparation of consolidated financial statements in a reporting system we can select automated booking entries that eliminate respective internal business between Consolidation Units. Whenever there are adjusting entries within the Consolidation Units those are also considered. By applying the definition of so-called posting levels we determine when an elimination entry is included in the final representation of the financial statements.
Moreover, certain conditions need to be met by the system entries for legal valuation and for audit purposes. It must be clear which of the stored entries have resulted from capital consolidation tasks, elimination, etc tasks. For that purpose, document types are assigned to the booking entries. What follows is further explanation of posting levels and document types.
Each system created entry is assigned a document type. The document type determines the posting level of the journal entry. When the entry is made, the system stores the posting level in the totals as well in the individual record database. Posting levels are used for classifying data based on their content in the SAP reporting system. Especially in case of the complex enterprise structures there is a need for rules when an entry for an adjustment, elimination, or consolidation is created and when it is to be included in the final reported financial statements. The number of levels is fixed in the system (cannot be extended) with the following levels provided:
* Reported financial data of the Consolidation Unit is included in the totals database and stored there at level 00. They are entered without creating a (journal entry) document into the totals InfoProvider.
* When the Consolidation Unit reported financial data is submitted and there is a need for subsequent corrections, those are created at level 01. Those correcting journals are not carried forward on the same posting level when the fiscal year is being closed, but are incorporated into level 00.
* When the Consolidation Unit reported financial data requires standardization for enterprise reporting purposes the entries are stored at level 10. The records of levels up to 10 can be made only for Consolidation Units, but not Consolidation Groups (except for level 02). Therefore, standardizing entries are valid for all Consolidation Groups into which the Consolidation Unit is fully consolidated.
* For eliminating the internal business (with exception of capital equity consolidation) we utilize level 20. Reclassifications, at the enterprise level only, interim period eliminations of short-term assets are from the legal point of view only valid when the counterparty unit belongs to the same Consolidation Group and is also included in full consolidation. The recorded entries store not only Consolidation Unit but also Consolidation Unit’s (counterpart) Partner Unit. Consolidation Group is the accounting object for levels 02, 12, 22, and 30. Entries at those posting levels are valid for all Consolidation Groups that fulfill the prescribed conditions and not only in the group for which the task is being executed. According to IAS 28.22 the internal business with entities consolidated according to the equity method financial result is eliminated in the interim periods. Profits and losses resulting from ‘upstream’ and ‘downstream’ transactions between an investor (including its consolidated subsidiaries) and an affiliate are recognized in the investor’s financial statements only to the extent of the unrelated investors’ interests in the affiliate. With regards to the Partner Units the Consolidation Unit needs to be configured for “Equity method” accounting technique and method in the consolidation tasks. Notwithstanding this requirement, also booking entries for internal business between fully consolidated and equity units can also be made. The same is true between two equity units. However, the created entries are controlled by the posting levels accounting logic to the extent that they both are subject to full Consolidation with their Partner Units. The entries of equity units are then not included in the finally consolidated reported balances of the enterprise. However, through automated reading of the changes in owners’ equity it is still possible to include the results of e.g. intercompany balance eliminations. Therefore, for the equity entities to be included in interim results we utilize the posting level 30.
* For executing the task of (capital equity) investment consolidation for both automated and manual postings, the level 30 is used. This level is also used for interim result elimination in short- and long-term assets with regards to supply chain and/or equity entities. Those records are entered for Consolidation Unit, Partner Unit, and Consolidation Group. In the reporting system, those records are valid for the Consolidation Group in question and for its parent units.
* Preparation entries for changes to consolidation groups are made whenever acquisitions and divestitures of Consolidation Units take place. This affects reported data (02), adjusted reported data (12), and consolidated data (22). This applies also to subsidiaries that are divested in tranches as well as when an equity investment becomes a fully consolidated entity and thus requires a full consolidation. The entries are also used for the first and last consolidations of investments when the reported, adjusted, and consolidated data is corrected. The fields are also provided for Consolidation Units as well as Consolidation Groups and for levels 22 and 24 and for Partner Units as well. The balances resulting from the new entries at those posting levels are not consequently carried forward into the new fiscal year.
In contrast to posting levels, number of which is fixed by the system, the number of document types can be freely extended by the users. Each journal entry, whether manual or automated, is assigned an exactly one document type. Each posting level, however, can have multiple document types assigned to it. Which document type is used in the Consolidation task is configured in the task definition. Thus, each entry is automatically posted at a specific level and with a specific document type. By utilizing document types, the entries can have coded additional information which can be used for structuring data in the database.
Basically, document types have the following purposes:
1. Booking differentiation
For valuation via the enterprise consolidation process, each task that creates an entry must be assigned a document type. By tracking document types a value adding process of creating the consolidated balance can be recreated. In the case of inventories, it can be inferred whether there were any required adjusting entries to arrive at the net realizable value for the asset valuation, and to which extent the interim result has been eliminated, and whether deferred tax asset or liability has been identified and needs to be rolled forward.
2. Booking classification
Document type can classify further which additional data is required. It determines which currency is required: local, transaction, or group or multiples thereof. The transaction currency is that of business transaction and booking entry. In addition to local currency, a transaction currency may be needed, especially when the business partners use different local currencies. When a manual or automated entry results in a net profit or loss the consequent tax effect can also be derived. When there is a tax effect for a profit neutral entry, the tax amount needs to be entered through a manual entry.
Let’s have a closer look at an example of the important qualities of a document type based on Document Type 51 – Consolidation of (capital equity) Investments:
1. Assigning document type to the posting level. For (capital) investment consolidation we utilize the posting level 30 – Consolidation Group – based Entry. Consolidation entries are thus valid for the given Consolidation Group and all its parents.
2. Posting characteristic value determines whether automatic or manual entries are allowed. When the document type is for tasks of Interunit and Interim Eliminations, and investment consolidation, it should be automatic. When a manual entry is desired, create a Consolidation Unit document type and configure the posting as manual. The Consolidation of investments is executed with document type 51, so the setting is automatic.
3. Select the currency in which entries are made. Whereas adjustments and correcting entries are basically denominated in Local Currency, consolidation entries are denominated in group currency. In case of an adjustment entry in a Consolidation Unit, the system will use Consolidation Unit’s currency when the Consolidation Unit is designated as currency bearing in Consolidation Area. The created (journal) documents will be translated into Consolidation Group currency during the task of Currency Translation.
The indicator for “Translate into Group Currency” determines translation of Local and/or Transaction currency denominated values into Group Currency values when the document is posted in Group Currency and at least one other currency. When the indicator is checked, postings denominated in Local and/or Transaction currency are selected during the execution of task Currency Translation and consequently the values are reported in Group Currency. When the indicator is not checked, the (journal) document must include values denominated in Group Currency in addition to Local and/or Transaction currency as this document will not be included in the Currency Translation task. This indicator is especially important in utilizing the functionality of Capitalization and Valuation Allowances. When a document type is selected for Interunit Eliminations and the translation differences are to be separated from the elimination differences (intercompany float) then the configured document type must have the indicator set for Transaction Currency in addition to Group Currency. The configuration of document type for automatic Consolidation of Investments should have Group Currency checked and for Goodwill in Local Currency should have Local Currency checked.
4. The configuration of “Deferred Income Taxes” Debits and Credits determines if the taxes are calculated for the given document type. Please note that the deferred income tax calculation is entirely based on income effects. Normally, the acquired entity’s deferred income tax assets and liabilities are calculated in Capitalization and Valuation Allowances task. For Consolidation of Investments the indicator is not being set because there is no tax impact from the share deal (reorganization) IAS 12.15 goodwill. Also, in case of obtaining purchase price below the fair market value according to IFRS 3.56 there are no temporary tax differences. The initial calculation and rolling forward of deferred taxes is however, required, in case of differences between the tax basis and book basis for assets and liabilities. The task of Capitalization and Valuation Allowances needs then the configuration ofdeferred taxes in the assigned Document Type.
5. Each document type is assigned a number range which generates sequential document numbers. When the number range has not yet been created, it can be configured via the “Number Range Maintenance” button.
6. The document type can determine how the system handles a recently executed Consolidation run. This feature is only turned on when it is configured in Version Combinations for “Repetition of Task Run” Depend on Document Type value selection. The document deletion is not affecting balances brought forward, but only documents of the period in question and the equivalent document type.
7. Configure how the system should handle preceding period postings. The indicator for Inversion determines whether the document type controlled postings and balances are still valid in the subsequent period. When the indicator is not set the posted balances within the document type are considered and only changes versus the preceding period are posted. When the indicator is flagged the documents posted in the preceding period are reversed in the current period. This takes place within the task of Period Initialization or at the beginning of the Consolidation task. This functionality is especially applicable in interunit eliminations. The Consolidation of investments is not utilizing automatic inversion postings…
8. For the system to generate automatically line items for (net) results and deferred taxes information is required for the FS item. The assignment of FS item for posting of deferred taxes can be driven either by document type or be configured globally. In the case of the global setting, the configuration is created in Selected Items.
a. Maintaining items for (net) results (characteristic of Clearing – Balance Sheet and Clearing – Inc. Stmt. Should be configured globally and not through the document type. Thus, we do not configure any settings dependent on document type.
b. Accruals for deferred taxes need to be differentiated between short and long term. This differentiation in postings lends itself to document types. For the automatic Consolidation of Investments deferred taxes are not calculated as previously mentioned for goodwill from reorganization and from the purchase price below FMV.
9. For the document types at posting levels 20 and higher a Clearing Item for Clearing – Cons Unit (intercompany clearing) can be defined. The document types for eliminations of interim results require a mandatory clearing item. That clearing item needs to be configured for Appropriation of Retained Earnings. By utilizing that item debit and credit balances of Consolidation Units are cleared after the elimination entry. For each Consolidation document there is a Consolidation Unit’s final balance that is booked to the configured clearing item. This Balance Sheet item is always netting to zero from the viewpoint of the CG…