Many companies find the consolidation of investments (COI) component more complicated than is warranted for their businesses needs, so they make consolidation of investments entries manually. However, you can automate these manual entries without fully implementing the COI component in SAP ERP Financials Enterprise Controlling-Consolidation (EC-CS) and Strategic Enterprise Management-Business Consolidation System (SEM-BCS).

Instead you can use inter-unit eliminations and reclassification functionalities of EC-CS and SEM-BCS to create automatic journal entries for investment activities. These journal entries are simple and easy to understand. The interunit eliminations and reclassifications functionalities also allow you to avoid time-consuming and risk-prone manual entries or additional COI postings that are often more complex than is necessary for many situations. They prevent duplicate records and cover both the purchase and equity methods of consolidation.

In many cases no implementation or only a partial implementation COI is needed to have automated consolidation of investments entries in SEM-BCS and EC-CS. For example, implementation of COI is not necessary when ownership of subsidiaries does not change often or when subsidiaries accounted for with the equity method do not provide a full trial balance to be loaded into the consolidation system.

When those types of subsidiaries can provide a full trial balance to be easily loaded into the consolidation system, partial implementation of COI may be more beneficial for automating the equity earnings postings for consolidation.

COI related entries are required in financial reporting to reflect ownership relationships between the holding companies (parents) and their subsidiaries and affiliates. The reporting entity draws one set of financial statements combining several entities under one umbrella or group.

Starting with an explanation of what COI does, I present options that SEM-BCS and EC-CS offer for consolidation of investments and ways to automate it in SEM-BCS and EC-CS without a full-blown implementation.

An Overview of the COI Component

A fully implemented COI can handle complex scenarios. It is needed for group shares and mutual stock methods. For the purchase method it automatically posts elimination of investment and corresponding subsidiary equity and the automatic recording of minority interest. For the equity method, the automatic posting of equity earnings or losses is recorded. For both the purchase and equity methods, COI automatically posts gains or losses on divestitures, which is not the case for the other alternatives presented in this article. However, it does include confusing statistical account postings (mentioned below) required for the automatic determination and posting of gains or losses on divestitures.

Here are some of the complexities of a fully implemented COI component that in some cases you can avoid:

• COI requires either additional financial data (AFD) postings to record investments and certain equity transactions or totals records from the source ledgers that separate such investment and equity transactions either with transaction types or separate accounts. This requirement adds a level of detail not included in many ledgers. It may cause rework in the source ledger system to capture the details or entries of AFD in SEM-BCS and EC-CS. You would need to record this data by entering it manually or loading it into SEM-BCS and EC-CS via flat file. (A flexible upload is a means of loading data into SEM-BCS and EC-CS via a flat file. You define the format of the file in customizing beforehand for the system to know to which field each value corresponds.)

• COI automatically records all equity transactions into statistical accounts that are used for the automatic determination and posting of gain or loss upon divestitures and partial divestitures. (Statistical accounts are not included in the primary financial statements such as balance sheet and income statement. They are configured with account type statistical as opposed to account type balance sheet or income statement.) If equity balances are not converted correctly into the statistical equity accounts at the time of go-live or the statistical account balance becomes out of sync with the actual equity account balances, it is difficult to realize that the conversion is incorrect or the equity data is out of sync, and if realized, difficult to repair. If this situation is not resolved, the automatic COI posting for the gain or loss upon divestitures is incorrect. These statistical accounts confuse most users and support personnel and can be avoided with the options I discuss if conditions are right.

COI Accounting Techniques

SEM-BCS and EC-CS provide several COI accounting techniques, including the purchase, equity, proportionate, and mutual stock methods. I briefly discuss these accounting techniques in this section.

The Purchase Method

For the purchase method, the parent entity is considered to have a dominating influence over the investee entity. Financial statements of the investee unit are included in their entirety in the consolidated financial statements. If an investee is not owned 100 percent, minority interest is recorded to recognize the portion owned by entities outside the group.

The Equity Method

With the equity method, subsidiary entities are not consolidated using purchase or proportional methods. Financial data of the entity is not taken into account in the individual lines of the consolidated financial statements. Only changes in stockholders’ equity of such entities are taken into consideration; these affect, in particular, the investment value stated in the consolidated balance sheet. Equity entities are not displayed in reporting.

The Proportionate Method

In SEM-BCS, COI does not include the proportionate method, but it is well documented that SAP suggests using reclassification tasks to carry out proportionate consolidation. (Tasks are functions executed as part of the overall consolidation process, and they typically update the data via automatic postings in the consolidation system.) This method includes accounts of an entity’s balance sheet and income statement into the consolidated statements to the extent of the parent entity’s percentage of ownership in the investee unit, rather than at the full amount. Because SAP provides a solution for this method that is well documented, this method is not addressed further in this article.

The Mutual Stock Method

This method is typically used in management consolidation. The mutual stock method and the purchase method are complementary. This method is associated with the concept of delta documents — the documents in the lower-level consolidation group that use the purchase method and those in the consolidation groups that use the mutual stock method merely have to be totaled. In management consolidation, the mutual stock method is an alternative to the equity method. This method requires fully implemented COI and is therefore not addressed further in this article. The alternatives I discuss automatically post entries to record the same entries as those of fully implemented COI without the complexities of COI.

SEM-BCS and EC-CS Functions

The following list includes most of the functions available with SEM-BCS and SAP EC-CS, which are typical for many consolidation systems and are necessary for consolidation. Some of them are specifically used in the solutions provided in this article:

• Carry forward of ending balances of one year to opening balances of the next year
• Collection of data from the source accounting ledgers
• Validation of data, such as total assets equal total liabilities and equity
• Manual adjusting (top-side) entries
• Reconciliation of intercompany balances
• Change to consolidation group to recognize midyear organizational changes
• Currency translation
• Reclassification* transfers values from one account assignment to another
• Value adjustments, also known as purchase accounting
• Interunit elimination* to eliminate balances associated with entities within a consolidation group
• COI* recognizing ownership relationships between entities within a consolidation group
• Dynamic reporting of consolidated results for any combination of entities

* These functions are used in the solutions provided in this article.

The COI Functions

The following consolidation of investment functions are instrumental to the solutions proposed in this article:  

• First consolidation. This function occurs when a subsidiary entity (investee) is first acquired in a consolidation group. With the purchase method, the parent entity’s investment is eliminated along with the investee’s corresponding equity. First consolidation is a prerequisite for processing in further activities of COI.

• Subsequent consolidation. This function records minority interests for the purchase method. With the equity method, an adjustment to the parent entity’s investment value is made that corresponds to the parent entity’s ownership share in the investee’s earnings/losses.
• Capital increase or decrease. This function occurs when a parent entity infuses capital in (increase) or extracts capital from (decrease) an investee in a consolidation group. With the purchase method the parent entity’s change in capital invested is eliminated along with the investee’s corresponding change in equity.

Alternatives for COI

You have two alternatives to a full implementation of COI to consider for addressing consolidation of investment activities in the consolidated results:

• Purchase method only, without COI configuration
• Both purchase and equity methods, without COI task

Purchase Method Only, Without COI Configuration

In some cases, you may record the equity method in the general ledgers of the parent entity. This type of recording may be because the trial balance for the subsidiary is not available in the ledger. In such cases the purchase method is the only requirement.

To automate the purchase method without COI configuration, you need to have an automatic elimination of investment and corresponding subsidiary equity. This process is accomplished with an automatic elimination task for which details are provided later in this article. Furthermore, for minority interest, you need to record the percent of minority share and use it in a reclassification to automatically post minority interest. (For more information on a reclassification, see the "Reclassifications" section.)

This approach avoids configuration and maintenance of COI as well as the confusing statistical equity postings mentioned earlier. (When fully implemented, COI automatically posts all equity account entries to statistical equity accounts, in which each equity account has a corresponding statistical account. These statistical account postings are used by COI for automatically determining and posting gains or losses upon divestiture of a consolidation unit.) It does not therefore provide the automatic posting of gains or losses on divestitures that COI provides. In such cases the gain or loss must be calculated and posted manually. Otherwise, the accounting is not according to generally accepted accounting principles (GAAP), which may be illegal.

Both Purchase and Equity Methods Without COI Task

For the purchase method, this solution includes the automatic elimination of investment and corresponding subsidiary equity, the recording of the percent of minority share, and the reclassification to automatically post the aforementioned minority interest.

For the equity method, it includes the recording of the percent of equity ownership share and a reclassification to automatically post equity earnings or losses. It does, however, require that the data be loaded for the equity held subsidiary through the normal data collection processes that are used for the other consolidation units that are also subsidiaries, that the equity method subsidiary be included in the consolidation group hierarchy, and that COI be configured to use the accounting technique assignment (for reporting, but no COI task is used).

Update master data to assign accounting techniques to all entities. These assignments are time dependent, so be sure the parameters are set to the correct period and year for the assignment. Although this approach avoids the confusing statistical postings, it does require some configuration of COI and does not provide the automatic posting of gains or losses on divestitures.

Processes to Know Before Configuring the Alternatives

Before discussing the configuration details of the alternative solutions, I walk you through a few processes that are helpful to know before starting the configuration.

Reclassifications

Reclassifications are used for automatic reclassification entries to adjust the financial data reported by consolidation units, to reclassify already-consolidated data, and for consolidation group-dependent postings. Reclassifications comprise the following components: a trigger, a source (optional), a target, a percentage rate (optional, but used in the solutions provided in this article), and a condition (optional).

Figure 1 diagrams a very simple reclassification using T-accounts in which the trigger account is assigned a debit of 500. This assignment triggers a credit to the source account and a debit to the target account. The trigger account is the account that initiates or triggers the reclassification. Without a value in the trigger account, no reclassification occurs. The source account is the account that is decreased by the amount of the trigger account. The target is the account that is increased by the amount of the trigger account. The trigger, source, and target are all defined in the customizing of the reclassification.

Figure 1

An example of T-accounts for automatic simple reclassification

Item Breakdown Category

The item breakdown category determines which subassignments a given financial statement item (account) has. Subassignments are characteristics used to further differentiate (break down) the values of the characteristic financial statement item, such as profit center, partner unit, movement type, or unit of measure.

Because statistical balance accounts are used to maintain the balance of minority shares for the purchase method and for the equity share for the equity method, the breakdown category for these accounts must include a unit of measure to store the values as a percentage. These percentages are used in the definition of the reclassification to determine the percentage of minority interest to automatically post.

To configure breakdown categories for a financial statement in SEM-BCS, use transaction code UCWB or follow menu path Strategic Enterprise Management > Business Consolidation > Consolidation Workbench > Process View > Master Data > Subassignments > Breakdown Cat. To configure breakdown categories for a financial statement in SAP EC-CS, use transaction code SPRO or follow menu path SAP Customizing Implementation Guide > Enterprise Controlling > Consolidation > Master Data > Financial Statement Items > Subassignments > Define Breakdown Categories. Figure 2 shows the SEM-BCS configuration for a breakdown category in which each characteristic subassignment is listed to the left of its defined breakdown setting. In Figure 2, the subassignment for Trading Partner is optional with initialized value (blank) allowed. All other subassignments are ignored and thus excluded from the data even if a value is provided.

Figure 2

An example of configuration for a breakdown category in SEM-BCS

Configuring the COI Alternatives

Now I walk you through the steps for configuring the alternatives.

Purchase Method Only, Without COI Configuration

For the automatic elimination of investment and corresponding subsidiary equity for the purchase method, create a one-sided elimination method with investment accounts selected. One-sided elimination is based on only one selection of accounts to be eliminated, whereas a two-sided elimination is based on two selections of accounts to be eliminated that would typically offset each other.

It is important that the investment accounts have a trading partner value as part of the record. This value is typically populated in the ledger system transactions using a validation to raise an error or warning message when a valid trading partner is not included on the transaction, and also requiring trading partner in SEM-BCS as part of the breakdown category assigned to the investment accounts. For the differences account define the equity account. Each interunit elimination method requires a difference account for posting any remaining balance.  

The elimination method may also be a two-sided elimination with selection 1 for investment accounts and selection 2 for equity accounts. In this case both the investment and equity accounts must have a trading partner to recognize the records as interunit as well as to dynamically determine where in the consolidation group hierarchy the eliminations are recognized in the reporting.

The remaining steps for defining the interunit elimination are to create a document type for automatic posting with posting level 20. Create a task for this elimination with the method and document type assigned and include the task in the task group for the monitor. (Tasks are assigned to task groups that are assigned to the task hierarchy. You can execute tasks individually or in groups from the monitor. The monitor provides a graphical overview of the consolidation units or consolidation groups, as well as tasks. It provides a central work environment for executing tasks for collecting, standardizing, and consolidating all reported financial data and monitoring the progress of the tasks for each individual consolidation unit or group. This process is another part of the consolidation configuration that is assumed to be, and in most cases would be, already configured.)

For the reclassification in SEM-BCS only, you need to create a statistical balance account to record the balance for percent of the minority share. In Figure 3, the statistical account for the percentage of minority interest is defined. To create this account, use transaction code UCWB or follow menu path Strategic Enterprise Management > Business Consolidation > Consolidation Workbench > Process View > Master Data > Items > Item. This account must be assigned a breakdown category to include a unit of measure to allow for quantities. You also need to have an additional statistical flow account for posting the offset. A statistical flow account is a statistical account for which the balance is not carried forward from year to year, where the balance of a statistical balance account is automatically carried forward from year to year. The offset account is needed because the entry to record a minority interest balance must be a balanced entry, which is a system requirement.

Figure 3

An example of an SEM-BCS statistical item for minority interest percentage

To create the reclassification to automatically post minority interest in SEM-BCS, create a method layout (that is, define prerequisites to be used in methods based on that method layout) with these components: percentage rate; source, condition, and target (Figure 4). To create a reclassification method layout, use transaction code UCWB or follow menu path Strategic Enterprise Management > Business Consolidation > Consolidation Workbench > Technical View > Method Layout > Reclassification.

Figure 4

SEM-BCS reclassification method layout for minority interest reclassification by percentage

In SEM-BCS, define a reclassification method using the reclassification method layout defined in this section. In the method definition, the first tab is for the Trigger/Percentage. For this method, choose the type of trigger data as transaction data, select the cumulative data setting, and include Parent/Subsid. = All.

For the type of percentage rate data, choose transaction data, with key figure = quantity, and cumulative. Add trigger characteristic = the statistical balance item to record balance for percent of minority share. The second tab of the method is for the Condition. Click this tab and define the condition key figure of quantity as > 0 and add characteristic = statistical balance item to record the balance for the percent of the minority share (Figure 5).

Figure 5

Define a minority interest reclassification method condition

The next tab in the method definition is the Source/Target definition. Click this tab and define the source as the minority interest income statement item and define the target as the minority interest balance sheet item. Include subassignments as needed (Figure 6).

Figure 6

Minority Interest reclassification method Source/Target definition

Create a document type and task. Assign the task and document type to the task group. In SEM-BCS, this step is accomplished by using transaction code UCWB and following menu path Process View > Consolidation Functions > Reclassification > Document Type. In EC-CS, this step is accomplished using transaction code CXEH or using SPRO and following menu path SAP Customizing Implementation Guide > Enterprise Controlling > Consolidation > Data > Automatic Posting > Reclassifications > Define Document Types.

For EC-CS, the reclassification is similar, except that there is a step in the reclassification for each different percentage rate with the consolidation units for each rate specified in the method step. EC-CS does not provide for reading the percentage from the items as in SEM-BCS. Therefore, a change in percentage with EC-CS requires a change in customizing, whereas for SEM-BCS, it is simply a matter of posting the change to the statistical account for the change in the percentage.

Both Purchase and Equity Methods, Without COI Task

In this method, you need to configure COI to activate the accounting techniques logic. This is needed for the consolidation reporting logic, which is discussed in my article “Reporting with SEM-BCS and EC-CS”, to determine whether to include records in the output based on the accounting technique assignment.

To activate the configuration of COI, you must include the COI characteristics investee, acquisition year, and acquisition period in the SEM-BCS data basis and consolidation area. You also need to generate the COI data streams for investment data, equity data, equity holdings adjustment data, goodwill data, activity numbers, sequence of activities, and activity sorting. Use transaction code UCWB and follow menu path Process View > Data Model > Data Basis > choose the Data Streams tab (Figure 7). Figure 7 shows the COI data streams for investment data, equity data, equity holdings adjustment data, goodwill data, activity numbers, sequence of activities, and activity sorting. The center column represents the InfoCube, and the right column is the corresponding virtual InfoCube for each.

Figure 7

SEM-BCS Data Basis COI data streams

To complete the activation of COI use transaction code UCWB and follow menu path Process View > Data Model > Consolidation Area > choose the Setting tab. In the consolidation area settings, select Consolidation of Investments in the Consolidation Functions Used section (Figure 8).

Figure 8

Consolidation of Investments in the Consolidation Functions Used section

Now that COI is activated, the COI customizing must be complete to activate the accounting techniques logic. The first step is defining the system utilization to indicate that both the equity and purchase methods are to be used. To configure the COI system utilization, use transaction code UCWB and follow menu path Process View > Consolidation Functions > Consolidation of Investments > Settings > System Utilization. Configure COI system utilization by selecting the Purchase Method and Equity Method options in the Accounting Technique section of System Utilization settings (Figure 9). Because the remaining settings are not used in this case, any acceptable setting suffices. However, for a typical USA COI scenario, the following settings are suggested:

In the Global Settings section, in the row for goodwill in divestiture of investments, choose No or complete Reduction. In the Further Settings section, select Extraordinary Amortization of Goodwill, Extraordinary Amortization of Negative Goodwill, and Negative Stockholders’ Equity. Choose Global for all the settings in this section.

Figure 9

COI system utilization for Purchase Method and Equity Method accounting technique

Now that the COI system utilization is defined, the COI location of values must be defined. To define the COI location of values, use transaction code UCWB and follow menu path Process View > Consolidation Functions > Consolidation of Investments > Settings > Location of Values (Figure 10). In the Location of Values section under the General tab, populate the fields as follows:

• Read investment data from: Additional Financial Data

• Read Equity Data From: Totals Database

• Read Equity Holdings Adjs From: Reported Equity Data

In the Calculation Base section, select all the document types listed in the Inclusion column.

Figure 10

The COI Location of Values section

The next step in the COI configuration is to define the equity and purchase methods. To define these, use transaction code UCWB and follow menu path Process View > Consolidation Functions > Consolidation of Investments > Method (Figure 11). In the bottom left Method window right click in the method space and click create to create the method EQUIT. Press Enter. Under the General tab, enter Equity Method in the Accounting Technique field and Direct Shares in the Acquisitions field.

Figure 11

COI method definition for Equity method

Remain in the method definition, and in the bottom left Method window right click in the method space and click create to create the method PURCH. Press Enter. Under the General tab, enter Purchase Method in the Accounting Technique field and Direct Shares in the Acquisitions field (Figure 12).

Figure 12

COI method definition for Purchase method

Now update the consolidation unit accounting technique master data. To assign an accounting technique to all entities, use transaction code UCWB or follow menu path Process View > Master Data > Consolidation Units > Accounting Techniques. These assignments are time dependent, so be sure the parameters are set to the correct period or year for the assignment.

The interunit elimination of investment and corresponding subsidiary equity for the purchase method is the same as described already for the Purchase Method Only solution. The statistical balance item to record balance for percent of minority share (SEM-BCS only) and the reclassification to automatically post minority interest are also the same as already described.

In addition, you need to create another statistical balance item (SEM-BCS only) to record a balance for percent of equity share as well as a reclassification to automatically post equity earnings or losses. This reclassification configuration is similar to reclassification for minority interest.

COI is used to recognize the ownership of consolidation units that belong to the consolidation group using different accounting techniques, such as purchase method and equity method. The accounting technique specifies to which extent the individual financial statement data of the investee unit is used to produce consolidated financial statements. SEM-BCS and EC-CS offer several ways to address COI. These methods range from simple to complex. Assess requirements for COI and choose the approach that best suits your needs. Research and understand the full capabilities available in support of each consolidation function. Simple solutions often exist to what may initially appear as complex issues.