TruQua BPC MEGA Elite Presenation

SAP BPC 10 NW MEGA ELITE Enablement
Configuration: Business Rules, Methods and
Consolidation of Investments

Business rules, methods and Consolidation of Investments
Agenda

Accounting Background
Business Scenario Overview
Business Rules Concepts
Detailed Scenarios Explanation

© 2011 SAP AG. All rights reserved. 2

Accounting terms
From Accounting Principles Board (APB) Opinion No. 18

a) "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.


Why consolidated statements?
Consolidated instead of separate financial statements for fair presentation

“The purpose of consolidated financial statements is to present, primarily for the benefit
of the owners and creditors of the parent, the results of operations and the financial
position of a parent company and all its subsidiaries as if the consolidated group were a
single economic entity with one or more branches or divisions.”

“There is a presumption that consolidated financial statements are more meaningful than
separate financial statements and that they are usually necessary for a fair presentation
when one of the entities in the consolidated group directly or indirectly has a controlling
financial interest in the other entities” (FAS 160)

Parent prepares Subsidiary
consolidated prepares separate
statements statements


How to account for investments?
US GAAP reporting methods

GAAP Allows for Three Methods Based on Level of Investment
1. 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 Statements

0% 20% 50% 100%


Fair Value Method

Fair 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


Equity Method

Equity 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


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)


Consolidated financial statements

Consolidated 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)

Debit Capital Stock
Debit Retained Earnings
Credit Non-Controlling (Minority) Interest
Debit Goodwill
Credit Investment in Investee

Influence, control and ownership

It’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


0% ??? ??? 100%


Which methods do we care about in SAP BPC?

GAAP Allows for Three Methods Based on Level of Investment
1. 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


0% 20% 50% 100%


POWN, PCON versus PCTRL
Percent 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)


0% ??? ??? 100%

Consolidation method codes
How consolidation method codes are coded to method types

Method codes are freely configurable but must be assigned to one of the
predefined method types:
1. ‘H’ for parent investors or holding entities
2. ‘G’ for subsidiaries that are to be financially consolidated with parent
3. ‘E’ for equity method investees


How to navigate there
Path to consolidation method types


Equity method versus consolidated statements
Difference between equity method and consolidated financial statements

Equity method does not combine balance sheet and income statements with
parent but rather recognizes share of investee income

Investee
Income


Equity method business rules
Using the equity adjustment type

To reverse equity method investee financial statements a special Adjustment
Type in Business Rules is used


How to navigate there
How to navigate to business rules


How to configure business rules
Configuring the header of an equity method business rule


Understanding intercompany eliminations
IFRS Starter Kit examples of intercompany eliminations

Eliminations are posted against an elimination clearing account for automatic
adjustment rules within their own data source


Understanding intercompany eliminations
Three types of inter-entity eliminations

Business Rule Approach Differences

Automatic Contribution model Eliminates trading partner (intercompany
adjustments approach dimension) pairs and also handles
consolidation of investments
US eliminations Elimination entity or “first Eliminates trading partner combinations
common parent” on a common elimination entity
approach

Intercompany Subsidiary reconciliation For reconciliation reporting, copies trading
bookings approach partner details onto each entity for
secured reporting purposes
© 2011 SAP AG. All rights reserved. 19 19

Understanding IC matching
How 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


Understanding consolidation of investments
IFRS 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)


Business Rules
Agenda



Business Scenario Example for Exercise
Acquisition 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%

Currency Translation
Cumulative 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


Consolidation of investments
Example 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


Equity Method – First Consolidation
Cost over book value purchase of equity method company

When cost is in excess of book value purchased, the difference must be
accounted 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)

Debit Goodwill
Credit Investment in Investee


Business Rules
Agenda



Key inputs to consolidation
Rates and ownership stored in separate models

Exchanged rates and Ownership Manager data are stored and referenced via
separate models

Reporting Consolidation
Model Model

Drivers
and Rates Rates Ownership
Models


Business rules drive consolidation logic
Business Rules control how Rates and Ownership are used

The Business Rules configuration control how the consolidation engine uses
the data stored and referenced in the rates and ownership model

Model Model

Business Elimination
Currency
and
Rules Translation
Adjustments

Drivers and Rates Ownership
Rates Models


How currency translation rates are referenced by account
Account 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


Currency translation currency lookup logic on entity
Entity 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


Currency translation
How rates are used

1. Rates are determined by a base currency

2. Base currency is determined via a default rate entity “GLOBAL” in
Consolidation Monitor


Where the rate entity can be customized
The mapping of the rate entity within Script Logic

Script Logic for Currency Translation illustrates the rate entity concept and
how it can be customized via Data Manager


How ownership is referenced for accounts
How consolidation percent ownership is referenced for minority interest

Model Model

Master Account
Data Dimension

Method-Based
Multipliers plus
Business Elimination and
Rules Adjustment
Business Rules

Drivers
and Ownership
Rates (POWN)
Models


How ownership is applied to entities
How Method-based Multipliers are mapped to entities

Model Model

Master Entity Dimension
Data

Method-Based
Multipliers plus
Business Elimination and
Rules Adjustment
Business Rules

Drivers
and Ownership
Rates
Models


Business Rules
Agenda



Currency translation exercise example
Breakdown 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)


Currency translation business rules example
Exercise example for currency translation

Currency translation rules to reverse out the out-of-balance effects and plug to Currency
Translation Adjustment account

Note that is example is simplified and illustrative and is not considered “best practice”


Currency translation business rules best practice
IFRS Starter Kit based currency translation rule best practices

Note the usage of rate differences (rather than calculating reversal totals) to
calculate Currency Translation Adjustment


Intercompany eliminations example
Consolidated financial statements example

B/S Elim

B/S Elim

I/S Elim Clearing Offset Account

I/S Elim


Intercompany eliminations
Intercompany elimination business rules

100% eliminations (hard-coded in Method-based Multiplier) for holding, purchase and
proportional method companies

Elimination clearing account determined dynamically via account dimension property
specification


Consolidation of investments example
Consolidated financial statements example

Elimination of Parent Investment
Goodwill

Elimination of Subsidiary
Equity against Reserve
NCI and NCI

Clearing Investment Offset Account


Explanation of Purchase Method Business Rules
Consolidated Financial Statements via Acquisition/Purchase Method Rules

Investment and Equity Eliminations
Calculation and Posting of Non-Controlling Interest
Calculation and Posting of Goodwill


Equity Method First Consolidation Scenario
Cost 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)


Explanation of Equity Method Business Rules
Cost over book goodwill scenario

How to achieve cost over
goodwill calculation and
posting with business
rules


Scenario Results and Business Rules
Live Demo


Thank You!

Contact information:

David Dixon
TruQua Principal
david.dixon@truqua.com

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