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					                                                                                                Chapter 6


EC-CS Functions
The following is a preliminary functional description of EC-CS. It describes
functions which are planned for Release 4.0. Some of these functions will be
partially delivered in the first Release 4 versions. The remaining functions
will be implemented soon thereafter.



Installing Sub-Applications/Dimensions
EC-CS can be divided into different ‘dimensions’ based on its multiple                        Dimensions
applications. Different departments can use the system in parallel. Common
elements, such as chart of accounts, can be used across departments while
master and transaction data are maintained separately. Authorization checks
prevent unintended activities across departments.

The benefit of validation checks and analysis across dimensions is nevertheless               Authorizations
available to reconcile data of internal and external accounting, for example.

   Executive
  Information                                    EIS
    System


                                            EC-CS Views
Central                                                      Profitability
                Company     Business area    Profit center                      User
consolidation                                                 Analysis
                Consolid.     Consolid.       Consolid.                        defined
                                                              Consolid.




                                      Operational SAP Systems

Decentralized  FI-GL          FI-AA         MM          SD       CO - PCA      CO - PA
processing
of accounting Financial       Assets      Materials   Sales &      Profit     Profitability
transactions Accounting     Accounting     Mgmt.      Distrib.     Center      analysis
                                                                 Accounting


Fig. 6-1: Integrated and ‘Free’ Dimensions

In the context of integration with SAP applications, the following consolidation              Integrated Dimensions
types are supplied as separate dimensions:
‰Company consolidation
‰Business area consolidation
‰Profit center consolidation
‰Consolidation of profitability analysis
These dimensions can be expanded by any number of user-defined dimensions.

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6     EC-CS Functions




                        Maintenance of Master Data for Consolidation Units
                        and Consolidation Groups
                        Consolidation units are the smallest units of a consolidation dimension which
                        can have ‘business relations’ with each other and act as ‘organizational units’
                        and business partners. As described in the previous chapter on architecture,
                        these units can be grouped – on multiple levels if required – and arranged in
                        hierarchies with different levels.

                        EC-CS provides user-friendly maintenance for such units, groups, and
                        hierarchies.

                        There are three options available at initial set-up:

      Manual Entry      ‰Manual entry for consolidation units and groups is typically carried out
                          top-down from a hierarchy display. To create the next hierarchy level,
                          the system provides quick entry of characteristics and descriptions in
                          list form. This is done through master data update of a representative
                          and inheritance to the other units.




                        Fig. 6-2: Entry of Consolidation Hierarchies

         Uploading      ‰If the consolidation units already exist in another non-SAP application,
                          flexible uploading is available to import and update these units.
         Reference      ‰If these consolidation units coincide with existing organizational units
                          within the operational SAP applications or can be combined with these
                          units, the corresponding master data can be referenced. When creating
                          hierarchies, this may considered as a way to form composite
                          consolidation units (for example company/business area).


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If a profit center hierarchy is referenced, the hierarchy information can be
transferred as well as the master data.
Master data contents can be determined at system implementation as a               Contacts
function of dimensions and levels according to the intended use. Required
and optional entries are defined at the same time. EC-CS manages both time
and version-dependent master data. The system also offers flexible ‘contact
management’ to manage information about the members of organizational
bodies, contacts, and auditors for comprehensive investment controlling.




Fig. 6-3: Master Data for a Consolidation Unit ‘Company’

SAP’s master data expansion techniques let you add customized fields               User Fields
which can be arranged either in standard or user-defined screens. A
reporting tool for combined analysis of this master data and transaction data
is planned.
Consolidation groups consist of a time and version-dependent listing of the        Inclusion Type
pertaining consolidation units (or other groups), as well as a large amount of
other information regarding the type of group ownership. In the context of
statutory consolidation at the company level, this can consist of data
concerning the inclusion type or reasons for non-inclusion.

Since consolidation groups and hierarchies frequently change during ongoing
operations, easy-to-use change methods are important, along with time-based
representation. It must be determined which application will have primary
maintenance responsibility for consolidation units or hierarchies which SAP
applications use in parallel. It must also be determined exactly how these
hierarchies will correspond with those of any other application. A profit center
hierarchy, for example, can be used in operational controlling and as a capital


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6          EC-CS Functions




                             investment program in investment planning (IM). It can also be used as the
                             hierarchy of a consolidation group in EC-CS.


                               EC-PCA                                                                   HR-ORG
                                                                   EC-CS
                                                  Profit
                                                  center




                                 CO                                                                            FI
                                              Cost centers                                     Coun.


                                                                                       Comp.           Comp.


                                                                                               CCode           CCode
                                                             Sub-tree reference
                                                    Time and version dependent assignment
                                                          Master data synchronization

                             Fig. 6-4: Synchronization with Hierarchies of Other SAP Applications

      Hierarchy Changes      To synchronize change management, the ‘application in charge’ informs
                             other applications if a change has occurred. Depending on the requirements
                             for correspondence, a work flow is triggered to initiate manual or automatic
                             updating. Manual changes within the hierarchy are supported by graphical
                             transfer functions. The system also supports mass changes.


                             Chart of Accounts, Additional Account Assignments, Comments, and
                             Special Financial Reporting Data
      Chart of Accounts      EC-CS recognizes structured and unstructured elements as information carriers
                             of consolidated financial statements. The chart of accounts, with its hierarchically
                             structurable items, represents the essential part of the structured information.
                             Chapter 5, Architecture, contains some examples. Fixed account assignments
                             predetermined by SAP are used to further differentiate an item. The ability to
                             add installation-specific user fields in the totals record structure of EC-CS is
                             planned for a later release.

      Additional Account     The common characteristic of this structured information is that a value,
            Assignments      typically a balance from a certain period, can be carried in up to three currencies.
                             This pertains to a combination of an item and additional account assignments
                             (optional). The line items of operational transactions documenting the balance
                             are typically not available to the consolidation system due to the sheer volume of
                             data involved.

              Line Items     However, in exceptional cases, a listing of such line items may be desirable
                             for specific items of financial reporting data. The list can be restricted to
                             significant transactions based on amount. Consequently, you can provide
                             balances for reporting purposes as well as significant single transactions.
                             This can be useful, for example, in statutory reporting for certain balance


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                                                                                   EC-CS Functions           6

sheet items, such as appropriations, or for special income statement items,
such as ‘other expenses/income.’ The structure of these line items is also
fixed.

Unstructured information regarding items or combinations of items and              Comments
additional account assignments can be stored in the database as text-based
comments. This data is displayed in reporting as a function of a combination
of period and characteristics.

Besides the structured and unstructured data described above, the system           Special Financial
recognizes a category of special financial reporting data for specific consoli-    Reporting Data
dation functions. For the most part, this data is not managed in the summary
database as ‘item breakdowns,' but in special reporting tables. This includes,
among other items, changes in investment and investee equity, as well as
inventory data and data on cost of goods manufactured which are required
for elimination of IC profit and loss in a consolidation of investments.

EC-CS delivers as standard extensive, ready-to-use charts of accounts. These       Standard Delivery
will be gradually supplemented by alternative charts which will be specific
to a country or an industry. At system introduction, method definitions and
report layouts based on these charts of accounts provide quick access to full
use of the great variety of system functions. Maintenance transactions to add
or update items and additional account assignments make it easy to adapt
the system to individual requirements. Especially if customization consists of
only expanding an item by additional detail items, reference techniques can
be used to generate new items and also pass on their use by ‘inheritance.'
Unless other definitions are entered, new items are immediately and
identically used in automated consolidation methods and reports.

This lets you include new items in the reporting process during ongoing
operations to meet changing information requirements.



Data Transfer from SAP Applications
A significant advantage of integrated consolidation is time savings by             Consolidation
preparing and reconciling initial data. This point is made in Chapter 3,           Preparations
Concept and Benefits of EC-CS Consolidation, which also discusses what is
referred to as consolidation preparations. This is where data is collected in
the operational systems specifically for consolidation purposes. If you
consider the time factor involved in financial statement processing, an
integrated solution at the group’s head office provides double time-savings.

The place of performance for data supply is the recipient’s system. The
reporting unit delivers the data either directly to the consolidation database
or prepares it so that the staff member in charge of consolidation can receive
the data at the push of a button. Besides periodic data transfer, direct posting
to the EC-CS database is also possible and especially useful in central
systems. With periodic transfer, reporting deadlines and timely ‘transfer’ are
monitored by a ‘closing schedule.’


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6         EC-CS Functions




                            Fig. 6-5: Financial Calendar

                            Since the local books of the reporting company code include a ledger with
                            the degree of detail required for consolidation transfer, the actual data
                            transfer is fast and usually takes only a few minutes. Subsidiaries linked
                            through ALE can execute transfers with similar speed and simplicity.

       Control Process      Another advantage is an exceptionally fast and efficient control process. A
                            reconciliation report compares the incoming data with the original sender
                            data. If there are any deviations, it generates an easy-to-use exception log
                            with simple analysis paths. This permits reconciliation between individual
                            and consolidated financial statements which is important to the auditor.

        Changes in the      In this context, the discussion must also include the general reconciliation of
      Chart of Accounts     all the definitions in customizing based on the consolidation guideline and,
                            in particular, the reconciliation between the consolidation chart of accounts
                            and the charts of accounts of the individual financial statements. The chart of
                            accounts can be transferred from the local group chart of accounts at system
                            installation. Subsequent changes in the chart of accounts trigger a work flow
                            to make the necessary updates in the consolidation system or vice versa.

                            In ALE scenarios, in which some group subsidiaries use separate R/3 systems,
                            the centrally maintained group chart of accounts can be automatically ‘sent’
                            and kept synchronous through the installations.




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Direct Data Entry with the Planning Processor
If the reporting group units use forms to report their data or if additional
statistical information or plan data is to be entered which is not available by
other reporting means, SAP R/3 financial reporting data entry is the
medium to receive plan data and/or any other financial information.

This entry tool, which is used throughout the SAP accounting system, is           Entry Layout
characterized by the great flexibility in which it can be defined. It provides
the additional advantage of uniform operation to accounting staff members
who use SAP applications to prepare individual financial statements.

The entry layout is defined through a ‘form painter’ which – comparable to the
report painter – permits almost any row and column arrangement of items and
additional account assignments. Predefined characteristics of a dimension (for
example, transaction types for fixed asset items) can be displayed using
corresponding ‘sets.’ Others can be dynamically supplemented.




Fig. 6-6: Data Entry with the Planning Processor

Besides the updates of the summary database, ‘entry documents’ can be             Entry Documents
generated to document the entry transaction, if required, particularly in the
case of subsequent corrections.

Entry layouts corresponding to the supplied dimensions and chart of               Standard Delivery
accounts are included with standard delivery of the EC-CS system.


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                           Data Transfer from External Systems
       Flexible Upload     External systems are defined as non-SAP applications which supply their data
                           in a form suitable for consolidation purposes directly through a program
                           interface. EC-CS provides a flexible upload tool which can be defined in
                           Customizing so that it conforms to the format of the dataset of the sending
                           application. Field position, field length, format, update methods, error
                           handling, and characteristics determination can be changed, if required. This
                           permits, for example, a conversion into the consolidation unit or the
                           consolidation chart of accounts number through user-defined rules or tables.
                           This data transfer method can also be used in combination with one of the
                           other methods. For certain subsidiaries another method can be adequate.
                           Different transfer methods can be defined for different versions (actual, plan).
         Checking and      As the data is imported, the system checks the validity of the individual
      Error Processing     values. User-friendly log processing makes it easy to update and, if required,
                           correct any incorrect records.



                           Decentralized PC Entry
         Access/Excel      EC-CS provides a PC entry module to be used if a group company does not use
                           SAP applications and is not able to employ a direct interface to its own
                           applications due to, for example, a lack of required data quality. This application
                           is based on MS Office products, Access and Excel. It provides special application
                           functions which SAP supplies as add-ons.

                           The most important functions of this solution include:

          Master Data      ‰Maintenance of master data in MS Access. This allows downloading of
                             centrally defined master data from EC-CS. It also offers decentralized
                             method of supplementing additional data records for exclusively
                             decentralized use.

                Forms      ‰Form management for reporting requirements. The data entry form
                             definitions are downloaded from the SAP system based on the required
                             reporting scope.

            Data Entry     ‰Data entry is either in MS Access or MS Excel. Excel has the advantage of
                             flexible form layout and superior entry performance.




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                                                                               EC-CS Functions          6




Fig. 6-7: Data Entry in an Excel Form

‰For specified items, line items can be added as cumulative entries while     Line Items
  the normal report typically includes only period balances.

‰Comments and texts can be entered for any characteristics combination        Comments
  and transferred with the consolidation report.

‰Parallel valuation bases lets you report both local and standardized         Parallel Standardized
  values to the consolidating unit. Standardized data represents local         Values
  subsidiary values that have been adjusted to meet a group’s statutory
  reporting requirements (US GAAP, for example). Standardized data
  can be entered either as a balance or as line items with comments.

‰Data import from PC files permits automatic data transfer from other         Importing
  applications. This data can then be further processed, checked, and
  transferred to the consolidation unit as a complete ‘form set.’

‰Validation checks based on centrally defined rules can be downloaded         Checking
  to MS Access and supplemented by company-specific rules. These must
  be verified before data is exported to the consolidation unit. The error
  log provides simple and sophisticated updating capabilities.

‰Currency translation, based on simple methods, can be used for               Translation
  decentralized reporting (for example, if data from several countries is
  entered at one reporting location). However, this function is not meant
  to replace complex central currency translation at the consolidation unit.

‰Reporting for the company’s own purposes can be decentralized using          Reporting
  the entered data, as well as historical data of earlier key dates.


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6      EC-CS Functions




              Export     ‰Data export to the consolidation system takes place through data carrier
                           or a direct network connection (RFC). This requires a wide variety of
                           checks, such as whether the data category (dimension, version, key date)
                           matches the currently required report. The EC-CS data monitor indicates
                           the receipt of data or indicates and accepts an incoming PC file.
         Languages       ‰Multilingual texts in the R/3 System, as well as in the interface elements
                           of the Access/Excel application, permit the reporting units to work in
                           their own language. It should be noted, however, that MS-Office
                           applications generally provide only one language for each installation.
       Authorization     ‰Authorization checks in the decentralized applications are supported
                           both on the application level (EC-CS dimension) and on the level of the
                           consolidation units to prevent unauthorized access even with
                           organizational division of responsibilities.
                         The PC entry program serves the EC-CS consolidation application and other
                         EC components as well. This ensures uniform data supply to central enterprise
                         controlling. A common ‘closing schedule’ controls which data is to be reported
                         for which sub-application on which date.



                         Data Transfer Monitoring
        Report Data      EC-CS controls the consolidation process through a user-friendly ‘monitor.’
                         The incoming report data is first checked for accuracy and completeness. The
                         actual consolidation process is then triggered and its individual steps are
                         monitored. The chapter entitled Push-button Consolidation describes the
                         process in further detail.




                         Fig. 6-8: Example of the EC-CS Data Monitor




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                                                                                           EC-CS Functions          6

The financial reporting data monitor is called up either for the entire group              Hierarchy
or for a given consolidation group. The consolidation group can be broken
down in a ‘tree’ display through the various hierarchy levels all the way to
the consolidation units.

The monitor displays the data transfer method defined for each unit as a                   Data Transfer Method
function of version and key-date. A detail screen displays form-dependent
exceptions, if any. The available methods, described in the previous chapters,
are listed below:

‰Real-time updating in the same R/3 System

‰Periodic rollup in the same R/3 System

‰ALE import from external R/3 Systems

‰PC file transfer from R/2 Systems

‰PC file transfer from MS Access

‰RFC import from MS Access

‰PC file transfer through flexible uploading from external systems

‰ALE import from external systems (BAPI)

With integrated transfer from SAP systems, FI or EC/PCA (profit center
accounting) data is transferred depending on the application dimension.

Along with the data transfer method, the monitor displays the status as                    Status
follows:

‰No data present

‰Data OK (data present and checked)

‰Data present (but not checked)

‰Data incomplete (the last import contained errors)

The last status permits jumping to the (archived) error log which is used to               Error Log
trigger corrections, if any, or to return to the status ‘no data.’ If the input file can
be corrected centrally, the data can be downloaded into an editor for corrections
and subsequently uploaded. This requires appropriate authorization.

For consolidation units with a status of ‘data present but not checked,’ the               Checking
validation check can be initiated from the monitor.

For an indication as to the completeness of the report, the monitor can be
prompted to display statistical information on the number of data records
reported.




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6            EC-CS Functions




                  Deleting     Especially during the test phase, it may be necessary to delete certain test data.
                               With corresponding authorization, the delete functions can be triggered from
                               the monitor.

                  Copying      Functions to copy data from other periods or versions are useful; for
                               example, if some units fail to report on time for urgently required periodic
                               financial statements and data needs to be copied for the sake of simplicity.
                               These functions are also require special authorization.



                               Validation Checks and Reconciliation
                               EC-CS recognizes the following types of validation checks and reconciliations:

                      Item     ‰Item-related checks based on item characteristics take place when data is
                                 entered. It may be specified, for example, that the balance of certain
                                 asset items must always be positive, the balance of certain revenue items
                                 always negative.

                     Form      ‰Form-related checks with manual entry in the planning processor or
                                 with decentralized PC entry ensure that there are no inconsistencies
                                 within the form. It is useful, for example, to perform a zero balance
                                 check in a balance sheet form.

        Consolidation Unit     ‰In contrast to consolidation units, a ‘validation group’ is used to
                                 determine which validation rules are to be verified across forms.
                                 Different validation groups can be assigned to different closing
                                 frequencies (year-end closing, month-end closing) or different versions
                                 (plan, actual, etc.) or even as a function of the significance of the
                                 consolidation unit.

    Balance Reconciliation     ‰Reconciliation of the balances of corresponding item groups is
                                 essentially a question of intercompany elimination and is discussed in a
                                 separate section.

          Document Lines       ‰ With standardizing and consolidation entries, validations are used for
                                  document lines to check whether an (additional) account assignment
       Additional Account         combination is allowed. Validations can also be used to limit the items
             Assignments          and additional account assignments that can be used in documents.

              Dimensions       ‰Validations can be used across dimensions and hierarchies to cross
                                 check identical values of special items between very different
                                 applications (for example, external and internal reporting). Reference
                                 tables containing the names of the corresponding consolidation units in
                                 the different dimensions/hierarchies can be maintained for this
                                 purpose.




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Fig. 6-9: Error Log from a Validation Check

The validations listed above are also used to define the validation rules in    Formulas
validation groups of validation checks related to the consolidation unit. The
system permits the following check formulas:

‰Comparison of item formulas (for example total assets = total liabilities)

‰Comparison of item formulas with additional account assignments (for
  example, depreciation income statement = fixed assets balance sheet
  restricted to transaction type depreciation)

‰Period comparison of item values (for example, the value of a specific item
  may change by no more than x% with respect to the previous period)

The severity of the check can be defined for each rule and have the character   Warnings and Errors
of a warning or an error. The monitor displays the validation result for all
the rules in the validation group by consolidation unit. The log shows the
error text and the two different values from the comparison formula. The
data records corresponding to these values can be interactively displayed.
Corrections are made by manually changing the values in the planning
processor or by making manual adjusting entries.

If the incorrect data was transferred automatically, a consolidation staff      Mail
member can notify the sending staff member of the corrections by automatic
mail.




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                PC Entry      Errors of this kind cannot originate in MS Access where a decentralized check
                              is performed with the same validation group before the data is exported.

                              The system performs these checks related to the consolidation unit based on the
                              reported values. It checks again in the consolidation process after standardizing
                              entries or, on the level of the consolidation group, after completion of the
                              consolidation steps, possibly in conjunction with other validation groups.



                              Postings
              Documents       Postings are distinguished from the data transfer methods described above
                              in that the individual transactions are entered as posting documents. Such
                              transactions are typically classified by ‘document types.’

         Document Types       The following are only a few examples of document types displayed in
                              statutory consolidated financial statements:

                              ‰Standardizing entries for statutory valuation

                              ‰Elimination of intercompany payables and receivables

                              ‰Consolidation of investments

                              The system can generate most of the consolidation entries automatically,
                              based on predefined methods. Separate document types are used for manual
                              entries. Document types have a number of characteristics and control
                              functions which are defined during system installation:

              Valuations      ‰Valuation of an entry is determined by the document type. The system
                                distinguishes:

                                  −    between standardizing entries based on the consolidation unit

                                  −    elimination entries between two consolidation units made in pairs

                                  −    group-related consolidation entries between any number of group
                                       units

              Currencies      ‰Currency definition for the document type determines whether
                                transaction, local, and group currencies are carried in parallel.

           Postable Items     ‰Item type definitions determine to which items postings can be made
                                with a given document type.

       Document Numbers       ‰The assignment of document numbers is controlled by corresponding
                                internal/external number ranges. The assigned document number can
                                later be used to redisplay or reverse a posted document. Depending on
                                the area of application, the transaction can be entered in document form
                                without saving the document. In this case, the balance is updated in the


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                                                                                 EC-CS Functions           6

    summary database but ‘itemization’ is omitted. This option, for which
    document numbers are not required, is selected particularly for
    simulations and automatically generated entries.

‰The zero balance check can be switched on or off on the document type          Zero Balance Check
  level. A zero balance check is always useful in the balance sheet and the
  income statement, but there can be other calculations where entries are
  to be posted on ‘one side’ only.

‰The system posts adjustments to retained earnings in both the balance          Adjustments to Net Income
  sheet and income statement automatically, when line items within a             for Period/Retained
  document affect both the balance sheet and income statement.                   Earnings

‰The system can also automatically post deferred taxes based on                 Deferred Taxes
  transactions, if this function is specified by the document type. The
  corresponding balance sheet and income statement items are
  determined in Customizing.

‰With postings across consolidation units, the system automatically             Elimination Entries
  generates elimination entries for items of a specific document type.
  Elimination entries of intercompany payables and receivables will affect
  the balance in the balance sheet display within a consolidation unit.

‰Automatic reversal in the following period can be defined as a                 Reversal in the
  document type characteristic. In this case, the system automatically           Following Period
  generates the corresponding reverse postings in the following period.

‰Reporting lets you obtain a clear overview of the documents posted, and        Reporting
  how they affected the transaction figures of the summary database (for
  example, organized in columns by document type).

Entering a posting transaction is simple. Based on the predefined document       Entry
type, the system prompts you for entry of one or several consolidation units
to which the posting is to apply. A text field is available for further
documenting the posting. Posting lines are entered as lists and input values
are checked. If required, the system generates automatic posting lines for the
adjustment to net income for the period/retained earnings and for deferred
taxes. The system checks the entire document before saving it (validation). It
confirms the posting by displaying the assigned document number.




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 6             EC-CS Functions




                                 Fig. 6-10: Entry of a Posting Document

Reference Function; Sample       A reference function simplifies the entry of similar documents. This allows
                Documents        definition of ‘sample documents’ with the desired line and item structure to
                                 make individual postings easier and safer.

                   Reversal      For reversals, the number of the original document is used to generate the
                                 reversal document. If desired, the two documents can be suppressed in
                                 reporting using a reciprocal reference. As a rule, the posting documents
                                 which are generated by automatic consolidation functions are automatically
                                 deleted and regenerated if the run is repeated during the same period.

        Journal Entry Report     A flexible journal entry report selects the posted documents by all attributes
                                 and prints them sorted by groups. Different layout definitions let you select
                                 and sequence the field information to be listed.



                                 Currency Translation
                   Methods       EC-CS provides a ‘currency translation’ consolidation function which covers all
                                 the generally accepted methods. A method definition primarily consists of
                                 grouping the translation-relevant items into ‘translation sets’ and assigning a
                                 translation type, an exchange rate indicator, and items for storing translation
                                 differences. These translation methods are assigned to the foreign consolidation
                                 units. Several methods can be defined and assigned depending on the nature of
                                 the foreign subsidiary (compare functional currency concept, FASB 52).




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                                                                                 EC-CS Functions          6

The system supports the following currency translation keys:                     Currency Translation
                                                                                 Keys
‰Standard exchange rates (spot exchange rate, average exchange rate) of
  the consolidation key date applied to the cumulative annual value

‰Standard exchange rates applied to the period value (each period is
  translated at the corresponding period exchange rate)

‰Use of historical exchange rates based on year of acquisition

‰Translation at weighted historical exchange rates from a transaction
  type quantization

‰Use of historical exchange rates from a separate record of changes in
  investments or changes in investee equity

‰Translation from the transaction currency instead of the local currency
  at standard exchange rates

‰Transfer of translated values without revaluation (determining only the
  translation difference at the reporting date exchange rate)

‰Translation to Group Value = 0 independent of the local value

‰Translation with customer-specific supplementary logic

The exchange rate indicator, in conjunction with an exchange rate version,       Exchange Rate
finds the corresponding exchange rates in the central SAP exchange rate          Indicators
table. Even with high inflation, exchange rate accuracy can be freely defined
by determining any factor between two currency codes (for example 1:1000).
Various strategies can be selected for the from-to translation to avoid the
need for updating all currency combinations.

An important topic in currency translation is the treatment of translation       Translation
differences which arise when the items are not all translated at the same        Differences
rate. The system recognizes what is referred to as ‘default translation’ (for
example, at the exchange rate of the reporting date). The system executes an
additional default translation for all items which use a different currency
translation key. It shows the resulting difference as a currency translation
difference. To ‘post’ these differences automatically, the system requires the
definition of the translation difference accounts and any necessary additional
account assignment. Reporting lets you analyze the causes for changes in the
translation differences.




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6           EC-CS Functions




                              Fig. 6-11: Currency Translation Log

               Rounding       After currency translation, certain values may no longer correspond in
                              group currency due to the effects of rounding. The system restores this value
                              correspondence (for example total assets = total liabilities) using special
                              rounding methods and allocates the rounding difference to a corresponding
                              item.

       Differences due to     Differences due to changing to a new standard exchange rate in the new
Different Exchange Rates      period can cause a loss of transparency in balance sheet items. For example,
                              in the case of balance sheet items which may represent a horizontal
                              development through transaction types, the resulting translation differences
                              can be represented through special transaction types within the initiating
                              item itself instead of through translation difference items. This lets you show
                              the differences due to different exchange rates in the asset history sheet.

    Currency Devaluation.     A special system function supports currency devaluation. For this purpose,
                              the new local currency key and ‘inflation rule’ are determined at the turn of
                              the year. A program then converts the balance carried forward of the
                              affected companies for the specified year.




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Group Eliminations
Group eliminations consist of all consolidation operations in which partner-       Application Areas
based elimination entries are made between corresponding items. In the
statutory financial statements application, this includes:

‰Elimination of intercompany payables and receivables

‰Elimination of revenues and expenditures

‰Elimination of investment income

This may also include ‘one-sided’ transactions in which eliminations are
carried out in only one consolidation unit, but a logical relationship exists to
another unit. This includes examples such as:

‰Reversal of group internal appropriations

‰Sales elimination based on cost of sales accounting

This type of elimination is also controlled by a user-defined method definition.   Method
Components of this method are:

‰Two FS item sets each for the corresponding items (for example, a
  receivables set and a payables set)

‰Assigned difference items, separately by debit/credit and by currency-
  related and other causes

‰Information as to the selection and the account assignment of the                Differences
  differential items by transaction types/sub-items

‰The simplification option ‘offset defined as one-sided’ expects the
  ‘partner breakdown possibly for only one FS item set. It posts the
  elimination in the partner automatically to the assigned difference item.

‰The difference strategy lets you determine different ways for the
  consolidation unit to assume the difference effect. For example, in the
  elimination of IC payables and receivables, a determination can be made
  that the ‘receivable ’ is always ‘right’ and that the partner must carry the
  difference.

‰Threshold amounts determine up to what amount offset differences are             Thresholds
  posted automatically, or if they must be adjusted in advance by
  appropriate corrections.




                                                                                                       6-19
6             EC-CS Functions




                                Fig. 6-12: Intercompany Reconciliation Through ‘Record Matching’

Reconciliation Process and      Intercompany eliminations are a component of both the reconciliation process
    Consolidation Process       as well as the consolidation process. The chapter Push Button Consolidation
                                describes the latter in more detail. The consolidation process generates and
                                posts elimination entries.
       Intercompany Record      The reconciliation process finds inconsistencies by comparing intercompany
                  Matching      reports of various reporting units and clearing them as much as possible within
                                the available time. Since financial reporting data is typically aggregated by
                                period balances and partner units, an analysis is possible only in the operational
                                system based on individual transactions. The SAP FI System uses intercompany
                                record matching to reconcile postings and clear up inconsistencies not only on
                                the reporting date but continuously, even before the balances are submitted for
                                consolidation. Consequently, related postings are interactively identified in the
                                receivables display and matched with the corresponding payables of the partner.
                                If the payables have not yet been posted, a reminder can be sent by electronic
                                mail.
        FI Line Item Display    If EC-CS works in the same central system as the operational company
                                codes, a drilldown can be used from the display of the balance differences to
                                call up the corresponding line item display for further clarification.

         Reconciliation Log     In the context of the reconciliation process described above, the accounting
                                staff member in charge of consolidation calls up the consolidation balance
                                display for their consolidation group showing the elimination difference for
                                each pair of consolidation units within the group. Selecting a ‘display
                                tolerance’ restricts the log to pairs of the highest differences. From this display,
                                additional detail information is obtained by drilldown. The pair of FS item sets
                                (for example, receivables/payables) is displayed with the totals of the two
                                units. This is followed by a breakdown based on the directions of the


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                                                                                      EC-CS Functions           6

reconciliation (Receivable 1 to Payable 2, Payable 1 to Receivable 2). Finally, the
breakdown can be further refined based on items and transaction currencies.




Fig. 6-13: Interunit Elimination Reconciliation Log

The following can be triggered from the log:                                          Actions

‰Automatic standardizing entries in the amount of the difference

‰Mail to accounting staff responsible for consolidation

‰Comments regarding the elimination entries


Elimination of IC Profit/Loss in Inventory
To eliminate intercompany profit/loss in inventory, inventory items are               Inventory Values
adjusted by intercompany profit or loss portions, if any. The result in the
income statement is corrected by the same amount. This type of elimination
is essentially controlled from data reporting which includes the following
data:

‰Inventory values differentiated by product groups and group vendors.
  Inventory values can be supplemented by value adjustment, delivery
  cost, and quantity data.
‰Cost of goods manufactured or profit/loss percentages, also by product              Percentages or Cost of
  groups and possibly differentiated by group customers.                              Goods Manufactured
On this basis, EC-CS first calculates the adjusted inventory value for each
vendor relationship and product group. The intercompany profit or loss can


                                                                                                         6-21
6           EC-CS Functions




                              now be calculated directly from the adjusted inventory value through a
                              profit/loss percentage. It can also be calculated using the ‘cost of goods
                              manufactured method,’ in which the inventory value is compared with the
                              product of quantity and cost of goods manufactured. Since the balance of the
                              profit/loss elimination of prior years is carried forward, only the net change
                              in the current period is posted to affect net income. Deferred taxes are
                              typically accrued for this portion.

                                Inventory mgmt.                                                 Product group
                                company                                          Vendor         A B C D E
                                                   MM
                                                                                                  Book values
                                                  Inventory-
                                                  accounting
                                                                     ?          Affiliate 1
                                                                                Affiliate 2       Incidental expenses
                                                                                                  Valuation
                                                                                Third-party       adjustment
                                                                                vendors           Quantities


                                Elimination         as percentage: profit/loss = Book value * markup %

                                                    in quantities:   profit/loss = Book value - (quantity * unit cost)




                                 Supplying                                                      Product group
                                 company          CO-PC                          Customers      A B C D E
                                                  Costing

                                                          CO-PA                  Affiliate 1
                                                                                                   Sales revenues
                                                   SD
                                                          Profit.-
                                                          Profit.
                                                          analysis
                                                                     ?           Affiliate 2
                                                                                        :
                                                                                                   Cost of goods sold
                                                                                                                   man.
                                                  Sales                                            Profit loss in %




                              Fig. 6-14: Integration of Elimination of IC Profit/Loss in Inventory

 Special Reporting Tables     The different inventory values and the data of the cost of goods manufactured
                              related to the product groups are managed in special reporting tables. The result
                              of the elimination of intercompany profit/loss can first be simulated as pure
                              analysis through tables. In the actual consolidation process (compare the chapter
                              entitled Push-Button Consolidation), it is converted into the corresponding
                              automatic postings.


                              Elimination of IC Profit/Loss in Transferred Assets
       Acquisition Costs      It may be necessary to eliminate intercompany profits/losses due to revaluation
                              at acquisition costs in the acquiring company when assets are transferred
            Depreciation      between companies. Furthermore, in a group asset history sheet, the transaction
                              is not represented as an asset retirement and acquisition but as a type of transfer
                              posting. The increase or decrease in depreciation due the revaluation must be
                              corrected in subsequent years as well.

                              As with elimination of IC profit/loss in inventory, the elimination process is
                              essentially controlled from the financial reporting data of the group companies
                              involved.



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                                                                                           EC-CS Functions            6

‰The selling company reports the asset retirement. It provides a                          Data Reporting
  description of the asset and the depreciation method, as well as the
  transferred APC, valuation adjustments, and the realized revenue.

‰The acquiring company reports the capitalization amount and possibly a
  change in the depreciation method. The system must establish the
  connection with the asset identification of the previous company and the
  capitalization amount must correspond with the asset sales revenue of
  the selling company.

The acquiring company reports whether a previously transferred asset is
resold or retired by scrapping so that the elimination transaction is ‘deleted’
in the consolidation reporting tables.


   Tranferring                                        Acquisition costs
    company                                           Cumulative depreciation
                                                      Depreciation method
                     FI-AA
                                                      Proceeds
                                                              History Sheet
                                               Beg. Bal. Acq. Ret. Trans. End. bal.
                                               1000        ---   200   ---        800



  Elimination         in year of transfer     Elim. of profit = Acquis. - net book value
                                              Elim. of profit = Acquis. & retirements in
                                              the asset history sheet
                      in subsequent years:    Depreciation adjustment
                                              Asset sale to third parties
                                              Resale within the group


    Receiving                                         Acquisition amount
    company                                           Depreciation method
                     FI-AA
                                                              History Sheet
                                               Beg. Bal. Acq. Ret. Trans. End. bal.
                                                                               bal
                                               ---         300   ---   ---        300



Fig. 6-15: Integration of Elimination of IC Profit/Loss in Transferred Assets

Based on this financial reporting data, EC-CS generates an elimination                     Elimination Scope
document in the transfer year. It adjusts the capitalized amount by the
intercompany profit or loss. Moreover, it changes the transaction types for the
group asset history sheet from retirement and acquisition to transfers. In
subsequent years, a depreciation correction is posted regarding the effect of the
intercompany profit/loss until the end of the asset’s useful life or until final
retirement is reported. If the acquiring company changes the depreciation
method regarding the transfer, a determination is made whether this change in
method is also to be ‘eliminated.’

Integration of intercompany profit/loss elimination with FI-AA Asset                       Integration
Accounting permits automatic transfer of all or selected transfer postings to
EC-CS, either in real time or periodically. FI-AA identifies these transactions
by special transaction types. FI-AA also ensures that the different effects due
to the following can be shown separately in the consolidation.

                                                                                                               6-23
6           EC-CS Functions




       Differential Effects   ‰Historic currency translation

                              ‰Difference in capitalization cost between local and group valuation

                              ‰Different depreciation methods between local and group valuation

                              ‰ Intercompany profits/losses


                              Automatic Reclassification Postings and Allocations
                              Automatic reclassification postings are used for a wide variety of application
                              areas. These postings represent a combination of complex selection and
                              variable substitution.

                    Rules     ‰A reclassification rule consists of a selection of consolidation units,
                                items, and additional account assignments. Based on the values of these
                                selected data records and their degree of detail, two postings each are
                                generated:

                                  −    The first posting is made either in the triggering item and its
                                       additional account assignments or in a different characteristics'
                                       combination modified by a first ‘substitution rule’ but having the
                                       value of the triggering item.

                                  −    The second posting (to which reclassification is effected) is
                                       determined by the second substitution rule.

                              The following examples illustrate this:

                Examples      ‰Revenues from production for internal requirements and intercompany
                                sales of fixed assets must be reclassified in period accounting to the item
                                ‘other capitalized goods/services on own account.’ The triggering item
                                may be:

                                  −    Asset acquisition with special transaction type

                                  −    The item to be credited sales revenue

                                  −    The reclassification item ‘other capitalized goods/services on own
                                       account’

                              ‰Reclassification of finished products from individual financial
                                statement’s view into semifinished products from group’s perspective.

                              ‰Change in functional area at group level when compared to individual
                                financial statements.




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                                                                                  EC-CS Functions          6

Consolidation of Investments
External/internal consolidation of investments is a consolidation step which is
typically required for external consolidation financial statements. However,
current thought increasingly holds that:

‰There should be ‘allocation’ to internal group units and products of the
  adjustment to net income for the period/retained earnings from the
  amortization of goodwill

‰That investment and equity considerations should enter even into profit
  center analysis

To that extent, the following functional description can be applied to internal
consolidation accounting.

No other consolidation type is covered more extensively by laws, regulations,     Statutory Regulations
and technical literature than the consolidation of investments. Furthermore,
significant differences exist between the various statutory territories (US-
GAAP, EU, IAS). These differences are essentially reflected in the method
definitions in customizing, as well as in various options provided by EC-CS.

There are different control options for investment consolidation methods          Inclusion Types
depending on the inclusion type:

‰Purchase method

‰Proportional consolidation

‰Equity consolidation

The essential determinations for the purchase method are listed below:

‰The treatment of differences from offsetting the investment book value          Differences
  against the proportional equity in the subsidiary can be represented as
  ‘capitalization of goodwill with scheduled amortization.’ It can also be
  represented as ‘offset of retained earnings with/without proportional
  elimination.’

‰ Hidden reserves/fair value adjustments can be considered when the              Hidden Reserves/
   difference is determined. In subsequent consolidations, this may result in     Fair Value Adjustments
   additional depreciation/amortization effects. An example of a hidden
   reserve/fair value adjustment could be the revaluation of a fixed asset as a
   result of the acquisition of a company.




                                                                                                    6-25
6           EC-CS Functions




         Minority interest    ‰Different methods can be defined to determine shares in equity or
                                earnings owned by outsiders in multilevel groups.

        Appropriation of      ‰Appropriation of retained earnings' items can be posted automatically
       Retained Earnings        either in the balance sheet or the income statement.




                              Fig. 6-16: Assignment of Consolidation Methods

       Step Consolidation     The method assignment can either be automatic, as a function of the extent of the
                              investment, or manual. With complex investments within step consolidations,
                              the method of consolidation can change from step to step. For example, a
                              consolidation unit can be consolidation via the equity method in a subgroup and
                              by the purchase method in the higher level subgroup. The system then generates
                              the correct representation on each level.

            Transactions      Consolidation of investments is not only controlled by the assigned method
                              but also influenced by special transactions which are reported either
                              independently by the participants or across companies. EC-CS recognizes
                              and automatically processes the following transactions:

                              ‰Acquisition/first consolidation

                              ‰Step acquisition

                              ‰Subsequent consolidation

                              ‰Goodwill amortization and minority interest calculation

                              ‰Increase in capitalization



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                                                                                  EC-CS Functions          6

‰Decrease in capitalization
‰Transfer (group-internal sale)
‰Change of method
‰Partial sale
‰Divestiture/retirement
‰Mergers
Different data will be required depending on the transaction. This data is        Financial Reporting Data
stored in three special reporting tables:

‰Changes in investments contain not only changes in book value but also, in
  particular, changes in the investment percentages and number of shares.

‰Changes in investee equity show which portion of capital stock is
  associated with which transaction and is subject to elimination or
  minority calculation.

‰Changes in hidden reserves/fair value adjustments and goodwill from the
  amortization/depreciation calculation for subsequent consolidations.

The accounting staff member checks the reported transactions for consistency      Simulation
and, if applicable, the processing sequence within the period. Consequently,
they can simulate and check the corresponding consolidation document from
transaction processing. Access to this information is through the consolidation
of investments report log. A breakdown is possible to any detail all the way
down to the display of the consolidation method parameters.




Fig. 6-17: Updating Transaction Data for Consolidation


                                                                                                    6-27
6           EC-CS Functions




            Push-Button       In the consolidation process, consolidation of investments is done at the
           Consolidation      push of a button. Any incomplete or incorrect posting run can easily be
                              deleted from the consolidation monitor and restarted after the initial data
                              has been corrected.




                              Fig. 6-18: Investment Consolidation Log

        Standard Reports      Special standard reports are available from this initial data, including the
                              preparation of a history sheet. In addition, special standard reports are
                              available from the summary database. These reports include equity aging
                              reports, net profit and minority interest analysis that show the effects of the
                              consolidation of investments.



                              Push-Button Consolidation
    Consolidation Monitor     EC-CS monitors the consolidation process through a consolidation monitor.
                              Depending on the application area, this process (which can be configured in
                              Customizing through ‘measure groups’) includes some or all the following
                              functions:

         Individual Steps     ‰Currency translation

                              ‰Standardized data validation check

                              ‰Interunit eliminations

                              ‰Reclassifications


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                                                                                     EC-CS Functions            6

‰Elimination of IC profit/loss in inventory

‰Elimination of IC profit/loss in transferred assets

‰Consolidation of investments

‰Step consolidation summary

‰Validation check based on group values

‰ Printing of preconfigured report package

These functions are executed in part on the level of the consolidation units and     Configurability
possibly by more than one person. The system lets you configure and display
in the monitor a hierarchical or even networked processing dependency with
workflow techniques and synchronization points, or as a fully automatic
sequence.

The rows in the monitor represent the consolidation groups of the different          Processing Status
hierarchy levels and their consolidation units. The columns show the individual
functions listed above. The processing status (shown below) is displayed in the
cells of this matrix.

‰OK (executed successfully)

‰OK (not relevant)

‰Open (planned but not yet executed)

‰Executed but incorrect

‰Incorrect execution canceled, open

‰Invalid due to subsequent changes in the financial reporting data or in
  customizing

Additional details pertaining to the cell can be interactively called up. Based on   Details
the columns, the archived processing logs can also be displayed.




                                                                                                         6-29
6         EC-CS Functions




                                Dimension: Legal (US-GAAP)                  Version:      Actual
                                                                                                    Action - Log
                                Cons. group: World                          Date:         12/1997   Perform. Date.   Action

                                                     Data       Curr. Validation Group Consolid.
                                   Group/Unit        input      trans. check      elim. Invest.

                                     Region 1           O.K      O.K     ERR

                                           Comp. A      O.K      O.K      O.K      O.K     O.K

                                           Comp. B      O.K     NOT      ERR      OPEN    OPEN

                                           Comp. C      O.K      O.K     WARN.     O.K     NOT
                                                                                                    Customizing
                                                                                                    Method definition

                                  Detail        Start         Reversal      Log          Meth.




                               Processing statistics                                                   Reversal function
                                                                                  Elimination
                               Push-button start                                                       Action log
                                                                         Validation check
                               Log management                          Translation




                            Fig. 6-19: Consolidation Monitor

              Reversal      With the appropriate authorization, the processing type corresponding to a
                            column can be started or reversed or the sequence of all steps for a row
                            (consolidation group) started.

                  Start     Instead of this ‘bundled’ push-button consolidation, some organizations
                            prefer the individual manual start of each process. This allows direct control
                            over intercompany profit and loss. Importantly, the monitor provides a
                            quick overview of the activities which remain open.

           Corrections      A consolidation process is occasionally invalidated by corrections on
                            different levels. For example, if financial reporting data is subsequently
                            corrected, or if methods are modified or reassigned, the consolidation must
                            be re-executed in its entirety or in part. Changes create signals in the
                            consolidation monitor to indicate that re-execution is required for entire
                            columns, entire rows, or individual cells.



                            Simulation and Version Concept
       What-If Analysis     Consolidation is frequently repeated under different premises before a final
                            result is achieved. However, since financial statements must be completed
                            within a given time frame, it is particularly important that the decision
                            makers be provided with alternative courses of action within the shortest
                            possible time. EC-CS places special emphasis on supporting simulations and
                            ‘what-if analysis.’ The variation of the premises and the saving of the results
                            is done through versions. Versions are also used to represent planning-
                            related data categories, such as:


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                                                                                   EC-CS Functions          6

‰Actual                                                                           Data Categories

‰Target, forecast

‰Annual plan

‰Medium term plan

A version is provided with classifications and attributes to distinguish it. The
available three-digit version identification can ‘express’ the scheduled
distinction of the data category and the simulation aspect.

The description below shows how emphasis is placed on simulation within a
‘scheduled data category.’

EC-CS distinguishes between consolidation (data) versions and add-on               Data Versions
versions. The consolidation data versions, as their name implies, are results
that can be displayed and compared in reporting. A data version is always          Add-On Versions
composed of an local-value-based version and document-type-dependent
add-on versions. In the simplest case, these versions are all identical. If a
simulation is only to represent, for example, the effect of a different method
for consolidation of investments, the existing data version definition can be
copied. It needs to be changed only with respect to the document type
pertaining to the consolidation of investments. If the consolidation of
investments is re-posted under this new version or document type, the final
simulation result is already achieved. Processing is affected by the ‘add-on’
method which saves time and disk space.

The previously discussed repeat consolidation of investments requires a            Reporting and
description of the changed premises or other selected options. For this            Assignment Versions
purpose, the system distinguishes between reporting versions and assignment
versions, which can be maintained as alternatives to the original version. For
the following, different financial reporting data can be carried in parallel:

‰Local values

‰Exchange rates

‰Tax rates for deferred taxes

‰Changes in investment and investee equity

‰Changes in profit/ loss of affiliates (equity holdings)

‰Hidden reserves/fair value adjustments

‰Data for elimination of IC profit and loss

‰Decentralized standardizing entries




                                                                                                     6-31
6            EC-CS Functions




                               Moreover, method assignments can be made separately for:

                               ‰Currency translation

                               ‰Interunit eliminations

                               ‰Elimination of IC profit and loss

                               ‰Consolidation of investments

                               ‰Reclassifications

                               ‰Validation checks

       Consolidation Group     Consolidation groups and their composition of other groups and units can also
                  Versions     be differentiated as a function of time and version. For example, ‘inclusion
                               options’ can be simulated.

              Restatement      An important operational requirement is the ‘restatement’ or the display of
                               comparison values from previous periods for the current consolidation
                               group of the current period. Depending on the accuracy required and the
                               type of consolidation group change, this requirement can be met directly in
                               reporting. This is where data of the previous period can be dynamically
                               selected together with master data hierarchy information of the current
                               period. In a complex case additional consolidation for the previous period
                               with the changed consolidation group will be required. An example of this is
                               if elimination postings are not all made in pairs, as may occur in the
                               consolidation of investments.




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