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.
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.
Reclassification Task (2011) > Reclassification Method (S2010) > Rules
• 010 – Selection for Trigger (S-IUE-PL-GP)
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.
Reclassification Task (2021) > Reclassification Method (S2020) > Rules
• 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)
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.
Reclassification Task (2031) > Reclassification Method (S2030) > Rules
• 010 Selection for Trigger (S-IUE-DIV)
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.
Reclassification Task (2041) > Reclassification Method (S2040) > Rules
• 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)
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)
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.