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TruQua BPC MEGA Elite Presenation

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Presentation demystifying SAP BPC Financial Consolidation Configuration

TruQua BPC MEGA Elite Presenation

  1. 1. SAP BPC 10 NW MEGA ELITE EnablementConfiguration: Business Rules, Methods andConsolidation of Investments
  2. 2. Business rules, methods and Consolidation of InvestmentsAgenda Accounting Background Business Scenario Overview Business Rules Concepts Detailed Scenarios Explanation © 2011 SAP AG. All rights reserved. 2
  3. 3. Accounting termsFrom Accounting Principles Board (APB) Opinion No. 18a) "Investor" refers to a business entity that holds an investment in voting stock of another company.b) "Investee" refers to a corporation that issued voting stock held by an investor.c) "Subsidiary" refers to a corporation which is controlled, directly or indirectly, by another corporation. The usual condition for control is ownership of a majority (over 50%) of the outstanding voting stock. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders or by court decree.d) …e) "Dividends" refers to dividends paid or payable in cash, other assets, or another class of stock and does not include stock dividends or stock splits.f) "Earnings or losses of an investee" and "financial position of an investee" refer to net income (or net loss) and financial position of an investee determined in accordance with accounting principles generally accepted in the United States. © 2011 SAP AG. All rights reserved. 3
  4. 4. Why consolidated statements?Consolidated instead of separate financial statements for fair presentation“The purpose of consolidated financial statements is to present, primarily for the benefitof the owners and creditors of the parent, the results of operations and the financialposition of a parent company and all its subsidiaries as if the consolidated group were asingle economic entity with one or more branches or divisions.”“There is a presumption that consolidated financial statements are more meaningful thanseparate financial statements and that they are usually necessary for a fair presentationwhen one of the entities in the consolidated group directly or indirectly has a controllingfinancial interest in the other entities” (FAS 160) Parent prepares Subsidiary consolidated prepares separate statements statements © 2011 SAP AG. All rights reserved. 4
  5. 5. How to account for investments?US GAAP reporting methodsGAAP Allows for Three Methods Based on Level of Investment1. Fair value method (FAS 115)2. Equity method (APB 18)3. Consolidated Financial Statements (ARB 51) 1. Acquisition Method (FAS 114R effective 2009) 2. Purchase method (FAS 141 through 2008) 3. Pooling of interests method (APB 16 through 6/30/02) Investor Ownership of the Investee’s Shares Outstanding Fair Value Equity Method Consolidated Financial Statements0% 20% 50% 100% © 2011 SAP AG. All rights reserved. 5
  6. 6. Fair Value MethodUS GAAP reporting methodsFair value method (FAS 115) Three categories of investment: 1. “Held-to-maturity” debt securities 2. “Trading” debt or equity securities 3. “Available-for-sale” debt or equity securities Investments that are either for re-sale (“held-to-maturity” or “trading”) or that are held (“available-for-sale”) with unrecognized gains in losses reported as separate equity item (under other comprehensive income) Dividends recognized as income Example journal entries: Debit – Available-for-sale investment Credit – Cash Debit – Cash Credit – Dividend income © 2011 SAP AG. All rights reserved. 6
  7. 7. Equity MethodUS GAAP reporting methodsEquity method (APB 18) • Investments where investor has ability to “significantly influence” investee (APB 18) • Investor recognizes its share of the earnings or losses of an investee in the periods for which they are reported • Share of the earnings or losses adjusts parent investment and reports the recognized earnings or losses in income. • Cash dividends reduces reversed to avoid double counting Example journal entries: Debit – Investment in investee Credit – Cash Debit – Investment in investee Credit –Investee income (on P&L statement) Debit – Cash Credit – Investment in investee (for cash dividends) © 2011 SAP AG. All rights reserved. 7
  8. 8. Consolidated financial statementsUS GAAP reporting methodsConsolidated Financial Statements (ARB 51) • Financial statements are combined between parent and subsidiaries in a common reporting currency (FAS 52) • Intercompany items are eliminated to avoid double counting • Various methods can be used to combine financial statements into one consolidated one such as: 1. “Proportional Method” (not US GAAP) 2. “Pooling of Interests” 3. “Purchase Method” 4. “Acquisition Method” • Under acquisition method, investment is eliminated against equity and the portion of equity not attributable to parent is created in the equity section as non-controlling interest (FAS 160) Example journal entries: Debit Capital Stock Debit Retained Earnings Credit Non-Controlling (Minority) Interest Debit Goodwill Credit Investment in Investee © 2011 SAP AG. All rights reserved. 8
  9. 9. Influence, control and ownershipUS GAAP reporting methodsIt’s about more control more than ownership: APB Opinion 18 states “The equity method tends to be most appropriate if an investment enables the investor to influence the operating or financial decisions of the investee…Influence tends to be more effective as the investor’s percent of ownership in the voting stock of the investee increases” ARB 51 was originally based on majority ownership of voting shares. After Enron FIN 46R, the basis for consolidation was expanded to any enterprise that controls the economic risks and rewards of an investee, regardless of ownership Fair Value Equity Method Consolidated Financial Statements0% ??? ??? 100% © 2011 SAP AG. All rights reserved. 9
  10. 10. Which methods do we care about in SAP BPC?US GAAP reporting methodsGAAP Allows for Three Methods Based on Level of Investment1. Fair value method (FAS 115)2. Equity method (APB 18)3. Consolidated Financial Statements (ARB 51) 1. Acquisition Method (FAS 114R effective 2009) 2. Purchase method (FAS 141 through 2008) 3. Pooling of interests method (APB 16 through 6/30/02) Handled in Handled in General Ledger Consolidation Ledger Fair Value Equity Method Consolidated Financial Statements0% 20% 50% 100% © 2011 SAP AG. All rights reserved. 10
  11. 11. POWN, PCON versus PCTRLPercent ownership, percent consolidation versus percent control Can flexibly define consolidation on either percent control (PCTRL) or percent ownership (POWN) Percent consolidation (PCON) is primarily for proportional consolidations Exercises are based on percent ownership (POWN) Fair Value Equity Method Consolidated Financial Statements0% ??? ??? 100% © 2011 SAP AG. All rights reserved. 11
  12. 12. Consolidation method codesHow consolidation method codes are coded to method typesMethod codes are freely configurable but must be assigned to one of thepredefined method types:1. ‘H’ for parent investors or holding entities2. ‘G’ for subsidiaries that are to be financially consolidated with parent3. ‘E’ for equity method investees © 2011 SAP AG. All rights reserved. 12
  13. 13. How to navigate therePath to consolidation method types © 2011 SAP AG. All rights reserved. 13
  14. 14. Equity method versus consolidated statementsDifference between equity method and consolidated financial statementsEquity method does not combine balance sheet and income statements withparent but rather recognizes share of investee income Investee Income © 2011 SAP AG. All rights reserved. 14
  15. 15. Equity method business rulesUsing the equity adjustment typeTo reverse equity method investee financial statements a special AdjustmentType in Business Rules is used © 2011 SAP AG. All rights reserved. 15
  16. 16. How to navigate thereHow to navigate to business rules © 2011 SAP AG. All rights reserved. 16
  17. 17. How to configure business rulesConfiguring the header of an equity method business rule © 2011 SAP AG. All rights reserved. 17
  18. 18. Understanding intercompany eliminationsIFRS Starter Kit examples of intercompany eliminationsEliminations are posted against an elimination clearing account for automaticadjustment rules within their own data source © 2011 SAP AG. All rights reserved. 18
  19. 19. Understanding intercompany eliminations Three types of inter-entity eliminationsBusiness Rule Approach DifferencesAutomatic Contribution model Eliminates trading partner (intercompanyadjustments approach dimension) pairs and also handles consolidation of investmentsUS eliminations Elimination entity or “first Eliminates trading partner combinations common parent” on a common elimination entity approachIntercompany Subsidiary reconciliation For reconciliation reporting, copies tradingbookings approach partner details onto each entity for secured reporting purposes © 2011 SAP AG. All rights reserved. 19 19
  20. 20. Understanding IC matchingHow to accelerate financial consolidation with peer-to-peer matching Designed to enable subsidiaries to do their own intercompany reconciliation with peers to expedite corporate reconciliation Copies the trading partner side of eliminations onto the receiving entity for secured reporting purposes Designed as a separate application with specific data sources to facilitate intercompany reconciliation Consider a separate application for IC matching; facilitates adding additional transaction currency dimension and having separate work status definitions© 2011 SAP AG. All rights reserved. 20 20
  21. 21. Understanding consolidation of investmentsIFRS Starter Kit example of consolidation of investment Elimination and adjustments also handle consolidation of investments where investments are eliminated against equity A different configuration of elimination that takes into account non- controlling interest (FAS 160)© 2011 SAP AG. All rights reserved. 21 21
  22. 22. Business RulesAgenda Accounting Background Business Scenario Overview Business Rules Concepts Detailed Scenarios Explanation © 2011 SAP AG. All rights reserved. 22
  23. 23. Business Scenario Example for ExerciseAcquisition and equity method example scenarios Organizational structure consisting of acquisition/purchase method (fair value and book value assumed to be same) in Europe (German parent owning 80% of UK subsidiary) and equity method in Asia (Japanese parent owning 30% of Australian associate) Consolidated financial statements that take into account: S_World 1. Group reporting currencies for both Europe and Asia is EUR and USD but currency translation exercise is focused on Europe in EUR (where S_Europe S_AsiaPac UK subsidiary is in GBP) 2. Intercompany eliminations of receivables and payables and revenue and expenses within DE JP100% Europe as well 100% UK AU 80% 30% © 2011 SAP AG. All rights reserved. 23
  24. 24. Currency TranslationCumulative translation adjustment example Financial statements of UK subsidiary is combined with German parent – Balance sheet is translated and month-end spot – Income statement translated at average rate – Retained earnings translated at both historical and average rates causing the balance sheet to be out-of-balance and necessitating an equity plug (i.e. “CTA” or “Currency Translation Adjustment”) In the exercise, currency translation adjustment is created by one account, Retained Earnings – Opening retained earnings balance is at an “As-Is” historical rate (group reporting currency values are loaded into the system so the balance is not translated – Current period retained earnings is translated at an average rate consistent with the income statement (since current period retained earnings of associate equals the earnings or losses of that investee) – The implied or effective rate of the “As-Is” historical rate just happens to be the same as month-end spot rate (to simplify the exercise example) – As a result, out-of-balance result is further isolated to current period retained earnings CTA calculation is as follows: – Current period retained earnings of 5 is translated at an average rate of 1.5 (equaling 7.50) instead of a closing rate of 1.25 (which would have been 6.25 to keep balance sheet in balance) creating a CTA difference of 1.25 (7.50 – 6.25) for the equity plug © 2011 SAP AG. All rights reserved. 24
  25. 25. Consolidation of investmentsExample T-Accounts for a hypothetical consolidation of investments T-accounts highlighting business rules-based investment eliminations with non- controlling interest split Illustrative example of the flexibility of rules-based financial consolidation where goodwill is written off to reserves © 2011 SAP AG. All rights reserved. 25
  26. 26. Equity Method – First ConsolidationCost over book value purchase of equity method companyWhen cost is in excess of book value purchased, the difference must beaccounted for in one of two ways:1. Assets that are undervalued on the investee’s books must amortize fair value differences over the remaining useful life of the asset (lest the asset life is indefinite)2. Goodwill remains without adjustment until the investment is disposed or impaired according to FAS 142 (effective Dec 15, 2001 and later)The exercise scenario illustrates the second approach under 30% ownership 1. Investment in associate of 250 2. Associate equity of 800 3. Proportionate book value of 240 (800 * 30%) 4. Cost over book value goodwill of 10 (250 – 240) Example journal entries: Debit Goodwill Credit Investment in Investee © 2011 SAP AG. All rights reserved. 26
  27. 27. Business RulesAgenda Accounting Background Business Scenario Overview Business Rules Concepts Detailed Scenarios Explanation © 2011 SAP AG. All rights reserved. 27
  28. 28. Key inputs to consolidationRates and ownership stored in separate modelsExchanged rates and Ownership Manager data are stored and referenced viaseparate modelsReporting Consolidation Model Model Driversand Rates Rates Ownership Models © 2011 SAP AG. All rights reserved. 28
  29. 29. Business rules drive consolidation logicBusiness Rules control how Rates and Ownership are usedThe Business Rules configuration control how the consolidation engine usesthe data stored and referenced in the rates and ownership model Reporting Consolidation Model Model Business Elimination Currency and Rules Translation Adjustments Drivers and Rates Ownership Rates Models © 2011 SAP AG. All rights reserved. 29
  30. 30. How currency translation rates are referenced by accountAccount dimension property drives which rate is applied to which account 1. Rates are stored under their own account dimension member (e.g. ‘AVG’) … Reporting Consolidation 2. … That are referenced to Business Rule Formulas Model Model 3. … That are stored as a Rate type property 4 4. … In the account dimension member of the Consolidation Model Master Account Data Dimension 3 Business Currency Rules Translation 2 Drivers and Rates Rates Models 1 © 2011 SAP AG. All rights reserved. 30
  31. 31. Currency translation currency lookup logic on entityEntity drives source currency and Group drives target currency 1. Entity Dimension Specifies the source functional currency 2. Group Dimension specifies the Reporting Consolidation target reporting currency Model Model Account Entity Group Master Data Dimension Dimension Dimension Business Currency Translation Rules Drivers and Rates Rates Models © 2011 SAP AG. All rights reserved. 31
  32. 32. Currency translationHow rates are used1. Rates are determined by a base currency2. Base currency is determined via a default rate entity “GLOBAL” in Consolidation Monitor © 2011 SAP AG. All rights reserved. 32
  33. 33. Where the rate entity can be customizedThe mapping of the rate entity within Script LogicScript Logic for Currency Translation illustrates the rate entity concept andhow it can be customized via Data Manager © 2011 SAP AG. All rights reserved. 33
  34. 34. How ownership is referenced for accountsHow consolidation percent ownership is referenced for minority interest Reporting Consolidation Model Model Master Account Data Dimension Method-Based Multipliers plus Business Elimination and Rules Adjustment Business Rules Drivers and Ownership Rates (POWN) Models © 2011 SAP AG. All rights reserved. 34
  35. 35. How ownership is applied to entitiesHow Method-based Multipliers are mapped to entities Reporting Consolidation Model Model Master Entity Dimension Data Method-Based Multipliers plus Business Elimination and Rules Adjustment Business Rules Drivers and Ownership Rates Models © 2011 SAP AG. All rights reserved. 35
  36. 36. Business RulesAgenda Accounting Background Business Scenario Overview Business Rules Concepts Detailed Scenarios Explanation © 2011 SAP AG. All rights reserved. 36
  37. 37. Currency translation exercise exampleBreakdown of the currency translation calculations Spot rate after triangulating GBP to EUR through USD (1.6875/1.35) = 1.25 If retained earnings period increase was translated at spot it would have been 6.25 (5 * 1.25) Retained earnings Difference of spot and Retained earnings period increase increase flow average for retained was translated at average coming earnings period increase to 7.50 (5 * 1.50) is 1.25 (7.50 – 6.25) © 2011 SAP AG. All rights reserved. 37
  38. 38. Currency translation business rules exampleExercise example for currency translationCurrency translation rules to reverse out the out-of-balance effects and plug to CurrencyTranslation Adjustment accountNote that is example is simplified and illustrative and is not considered “best practice” © 2011 SAP AG. All rights reserved. 38
  39. 39. Currency translation business rules best practiceIFRS Starter Kit based currency translation rule best practicesNote the usage of rate differences (rather than calculating reversal totals) tocalculate Currency Translation Adjustment © 2011 SAP AG. All rights reserved. 39
  40. 40. Intercompany eliminations exampleConsolidated financial statements example B/S Elim B/S Elim I/S Elim Clearing Offset Account I/S Elim © 2011 SAP AG. All rights reserved. 40
  41. 41. Intercompany eliminationsIntercompany elimination business rules100% eliminations (hard-coded in Method-based Multiplier) for holding, purchase andproportional method companiesElimination clearing account determined dynamically via account dimension propertyspecification © 2011 SAP AG. All rights reserved. 41
  42. 42. Consolidation of investments exampleConsolidated financial statements example Elimination of Parent Investment Goodwill Elimination of Subsidiary Equity against Reserve NCI and NCI Clearing Investment Offset Account © 2011 SAP AG. All rights reserved. 42
  43. 43. Explanation of Purchase Method Business RulesConsolidated Financial Statements via Acquisition/Purchase Method Rules Investment and Equity Eliminations Calculation and Posting of Non-Controlling Interest Calculation and Posting of Goodwill © 2011 SAP AG. All rights reserved. 43
  44. 44. Equity Method First Consolidation ScenarioCost over book value goodwill scenario 250 – (800 * 30%) Cost over book value Investment reduction Investment Financial statement reversals Translated book value (proportionate value is 30% or 240) © 2011 SAP AG. All rights reserved. 44
  45. 45. Explanation of Equity Method Business RulesCost over book goodwill scenarioHow to achieve cost overgoodwill calculation andposting with businessrules © 2011 SAP AG. All rights reserved. 45
  46. 46. Scenario Results and Business RulesLive Demo © 2011 SAP AG. All rights reserved. 46
  47. 47. Thank You!Contact information:David DixonTruQua Principaldavid.dixon@truqua.com
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