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Author's profile photo Madhusudhan T C

Group Reporting | Intercompany Elimination – Accounting Entries

Introduction

In the process of preparing Consolidated Financial Statement, intercompany elimination is one among the steps. Intercompany Elimination refers to excluding of / removing of transactions between the companies of same consolidation group from the Consolidated Financial Statements. The reason for doing so is to reflect the financials that would appear as if all the legally separate companies were a single company.

In SAP Group Reporting, Intercompany Elimination is achieved by the reclassification function with following Reclassification Tasks in Consolidation Monitor;

  • Inter Company Elimination – Sales (2011)
  • Inter Company Elimination – Other Income/Expense (2021)
  • Inter Company Dividends Elimination (2031)
  • Inter Company Elimination – Balance Sheet (2041)

This blog emphases on accounting entries relating to IC elimination in SAP Group Reporting, which helps us understand the elimination impact on Consolidated Financial Statement.

Investments/Equity Elimination is not part of this blog as it is a topic by itself.

Configuration Flow

Reclassification Task > Reclassification Method > Rules > Selection for Trigger > Selection (in some cases)

Upon executing Reclassification Task, the system calls for Reclassification Method assigned to it. Reclassification Method consists of certain set of Rules defined according to which reclassification (elimination) entries are posted.

These rules specify settings for the following;

  • Selection of financial statement (FS) items that triggers the reclassification (Selection for Trigger).
  • Posting the reclassification entries to the triggering consolidation unit or partner unit.
  • Source account and destination account assignment (like Subitem) for reclassification.

FS Item > Elimination Selection + Partner Cons. Unit + Elimination Target

Reclassification Rule to eliminate Inter Company transactions gets triggered for line items with;

  • FS Item having same ‘Elimination Selection’ as ‘Selection for Trigger’ defined in the Rule and
  • Partner Cons. Unit

The corresponding Dr/Cr line in elimination entry will be posted to the FS Item configured in Elimination Target attribute of triggering FS Item.

Intercompany Elimination – Accounting Entries

1. Inter Company Elimination – Sales

This task performs elimination of internal gross profits between units in the consolidation group, which exist, for example, if goods or service transactions take place between consolidation units.

Configuration
Reclassification Task (2011) > Reclassification Method (S2010) > Rules
Rules (Sequence)
• 010 – Selection for Trigger (S-IUE-PL-GP)

Triggering Item
FS Item with Elimination Selection (S-IUE-PL-GP)
+ Partner Cons. Unit
+ Elimination Target (412100 – Changes in Inventory)

Elimination Entry
Document Type 2E | Posting Level 20

The elimination entry removes IC sales from the Cons. Unit (Vendor) and IC purchase from the Partner Cons. Unit (Customer). Effectively, removing IC sales (revenue) and IC purchase (expense) from the Consolidated P&L statement.

2. Inter Company Elimination – Other Income/Expense

This task performs the elimination of other income and expenses in the Profit and Loss (P&L) statement.

Configuration
Reclassification Task (2021) > Reclassification Method (S2020) > Rules
Rules (Sequence)
• 010 Selection for Trigger (S-IUE-OTH-PL) > Selection (S-IUE-OTH-PL-INC, S-IUE-OTH-PL-EXP)
• 020 Selection for Trigger (S-IUE-OTH-PL-FIN) > Selection (S-IUE-OTH-PL-FIN-INC, S-IUE-OTH-PL-FIN-EXP)

Triggering Item
FS Item with Elimination Selection (S-IUE-OTH-PL-FIN-INC, S-IUE-OTH-PL-FIN-EXP)
+ Partner Cons. Unit
+ Elimination Target (65400D – Clearing Account – Financial result)

Elimination Entry 
Document Type 2F | Posting Level 20

The elimination entry removes IC income/expense from the Cons. Unit/Partner Cons. Unit and transfers the same to a clearing account. Effectively, removing IC Income and IC Expense from the consolidated P&L statement. The clearing account will get nullified with a debit and credit (there will be balance if IC entries are not complete or incorrect).

3. Inter Company Dividends Elimination

This task eliminates the dividends received from a consolidation unit belonging to the same consolidated group.

Configuration
Reclassification Task (2031) > Reclassification Method (S2030) > Rules
Rules (Sequence)
• 010 Selection for Trigger (S-IUE-DIV)

Triggering Item
FS Item with Elimination Selection (S-IUE-DIV)
+ Partner Cons. Unit
+ Elimination Target (316000 – Retained Earnings)

Elimination Entry
Document Type 2H | Posting Level 20

The elimination entry removes IC Dividend and increases Retained Earnings. Effectively reversing the effect of IC Dividend from Consolidated Financial Statement. The elimination entry being having only debit impact on P&L; reduction in net income is adjusted in the Calculated Net Income (Data Monitor).

4. Inter Company Elimination – Balance Sheet

This task performs the balance sheet elimination.

Configuration
Reclassification Task (2041) > Reclassification Method (S2040) > Rules
Rules (Sequence)
• 010 Selection for Trigger (S-IUE-BS) > Selection (S-IUE-BS-AR, S-IUE-BS-AP, S-IUE-BS-OR-C, S-IUE-BS-OP-C, S-IUE-BS-DIV-REC, S-IUE-BS-DIV-PAY, S-IUE-BS-OR-NC, S-IUE-BS-OP-NC, S-IUE-BS-FA-NC, S-IUE-BS-FL-NC, S-IUE-BS-FA-C, S-IUE-BS-FL-C)

Triggering Item
FS Item with Elimination Selection (S-IUE-BS-OR-C, S-IUE-BS-OP-C)
+ Partner Cons. Unit
+ Elimination Target (21100D – Clearing account – receivables/payables, Current)

Elimination Entry
Document Type 2G | Posting Level 20

The elimination entry removes IC assets/liabilities from the Cons. Unit/Partner Cons. Unit and transfers the same to a clearing account. Effectively, removing IC Assets and IC Liabilities from the consolidated Financial statement. The clearing account will get nullified with a debit and credit (there will be balance if IC entries are not complete or incorrect).

The above entries are based on Best Practice ‘Group Reporting – Financial Consolidation (1SG)’ content. Configuration can be changed as per business requirement.

Hope you find this blog helpful.

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      10 Comments
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      Author's profile photo K S Prakash
      K S Prakash

      Thanks for the explaining this in sufficient detail....very well articulated

      Author's profile photo Rahul Girdhar
      Rahul Girdhar

      Nicely written with illustrations, and very comprehensive.

      Author's profile photo Vinay Dhamnani
      Vinay Dhamnani

      Very informative blog. Thanks Madhu.

      Author's profile photo Nitin Kathait
      Nitin Kathait

      Thanks Madhu for this nicely articulate and structured explanation.

      Author's profile photo Gayathri Krishnamachary
      Gayathri Krishnamachary

      An Accountant's perspective neatly brought out !!

      Thanks

      Author's profile photo Venkata Singanamala
      Venkata Singanamala

      Thanks for info on the IC Elim entries with impact.

      Thanks

      Venkat

      Author's profile photo Emanuele De Pasquale
      Emanuele De Pasquale

      Thanks to sharing your experience on IC . I have a question concerning intercompany, Do the version 2020 Group Reporting \ICMR allow to calculate profit elimination from stock and COGS?

      This I am referring is the inventory IC scenario

      Thanks

      Author's profile photo Madhusudhan T C
      Madhusudhan T C
      Blog Post Author

      Hi Emanuele,

      The functionality you are asking for is not available yet out of the box.

      As per SAP Roadmap Explorer, we see enhanced rules to automate interunit elimination of profit in inventory planned in Q4 2021.

      Author's profile photo Ravi Yadav
      Ravi Yadav

      Mandatory read for GR solutioning. Grateful for your time in explaining the most critical and complex processes of GR in such a lucid manner along with configuration and accounting entries. Thanks a ton!!!

      Author's profile photo Laxmi Narayan Subudhi
      Laxmi Narayan Subudhi

      Thanks Madhu, it really guides

      I have a question - in the example you have shown the clearing FS item is getting nullified, but in real business scenario, the clearing account has the balance to the extent of currency translation difference, and this will be reflected in Group Trial Balance, if you don't clear it of manually. How do we address this issue, any pointers....