Performing Horizontal Business Combinations or Horizontal Mergers in SAP Group Reporting
Meet the Experts
⇨ When it comes to mergers and acquisitions, Consolidation of Investments (COI) can be considered one of the most challenging scenarios to implement.
⇨ SAP Group Reporting has improved its COI processes in its latest release.
⇨ Organizations can now utilize SAP Group Reporting to enact a wider range of M&A scenarios, including horizontal mergers.
Welcome to the world of M&A (Mergers and Acquisitions) with SAP. Certainly, it is exciting; there are lots of secrets before the transaction is confirmed, big investment banks involved, lots of money most of the time, and at the end it is vital to correctly reflect it in the financial statements of the different entities involved. From an SAP Group Reporting point of view, Consolidation of Investments (COI) can be considered one of the most challenging scenarios to implement. For that reason, many Big Four Consulting firms still choose to avoid it and give this challenge to companies like Arellius Enterprises.
In its latest release, SAP Group Reporting has improved and/or corrected COI processes that were not quite working properly in the past releases for some of the scenarios shown in Table 1. However, there are still only two options in SAP Group Reporting to implement Consolidation of Investments (COI) in SAP: rule-based using Task 2100 and activity-based using Task 2101. All these process postings in Posting Level 30 are only at the Group level. To be clear, you must choose ONE of the two types of COI and you cannot migrate from one to the other. If you change your mind (if you implemented rule-based and your scenarios have limitations that only activity-based can perform, for example) you must reimplement everything again in the activity-based COI.
For these complexities, I created Table 1 to show the capabilities and M&A scenarios possible using SAP Group Reporting. In this document we will focus our attention on Horizontal Mergers.
Table 1—SAP S/4HANA Group Reporting Supported Consolidation Scenarios HANA 2022
As shown in Table 1, it is clear activity-based COI is applicable to a significant number of scenarios in comparison with rule-based COI and it is still the recommended solution to be deployed in case your company changes in the future as M&A activities can occur at any time. In addition, rule-based COI has certain limitations:
- Limited level of automation since some postings need to be completed manually.
- Minorities in Goodwill can’t be calculated automatically.
Horizontal Mergers: Overview
The Consolidation Activity called Horizontal Merger, is better explain with Figure 1. Notice there is the Europe Group (GRE00) and Southern Europe Group (GRS00). The holding company for the overall groups is Germany (TA00), and subsidiaries Spain, Portugal, and Italy belong to Southern Europe Group (GRS00). Notice that the parent Germany has 80% ownership in the parent of Southern Europe company ES00 Spain. Then, Spain owns 80% of both Portugal and Italy, in this case it is clear for consolidation purposes within the same group will simplify their financials it both Portugal and Italy are merged into one single entity.
As shown in Figure 1, Italy will absorb Portugal, thus all transactions from Portugal will be included moving forward in the Italy Consolidation Unit. Remember, Consolidation Unit and Company Code from a technical point of view they are not the same, they are different objects in SAP. Also, during a Horizontal Merger, the entire balance sheet of the Target Consolidation Unit is transferred to the Absorbing Consolidation Unit.
Figure 1—Example Scenario for Horizontal Merger
Now that we understand in theory what we are trying to achieve as described in Figure 1, there are certain pre-conditions for Horizonal Mergers as follows:
- There is a Target entity (Investee 1, Portugal) and an Absorbing Entity (Investee 2, Italy). In the case of Figure 1, Portugal will be absorbed by Italy.
- Horizontal Merger means that Investee 2 (Italy) is NOT the Parent Entity of Investee 1 (Portugal). This means, Italy has no investment in Portugal.
- Both Consolidation Units Investee 1 and Investee 2 belong to the SAME Consolidation Group. In this case, GRS00-Southern Europe.
- Both Target and Absorbing Entities belong to the SAME Direct Investor. In Figure 1, it means that both Italy and Portugal belong to the holding company Spain which is the Parent of the Southern Europe Group.
- The direct share of the common investor (ES00-Spain) in both investees in the same group is the same. In the case of Figure 1, Spain owns the same amount of 80% investment in both Portugal and Italy within the same group Southern Europe.
After these pre-conditions are met, the system will transfer the entire Balance Sheet from the Target during the Horizontal Merger. It is included in the Absorbing Entity moving forward. In this case, Portugal Balance Sheet will be included moving forward into the Italy Balance Sheet Financial Statements, certainly the company code for Portugal must not continue to be populated with transactional data after the total divestiture of Portugal occurred in the system. After the Horizontal Merger Process is executed, the following will occur within SAP Group Reporting:
- The system will adjust Italy Consolidation Unit (Absorbing Entity) with an increase of capital from Portugal Consolidation Unit (Target).
- The system will consider the Target (Portugal) as a total divestiture entity, and thus after the Merger it will not exist within the system because the capital of the Target (Portugal) will be taken over by the Absorbing Entity (Italy).
Horizontal Mergers: Configuration Steps
In IMG as shown in Figure 2, access the menu Group Reporting/Consolidation of Investments/Display System Utilization for C/I. Depending on your SAP S/4HANA Group Reporting version, you might need to raise a special ticket with SAP to have this flag activated shown in Figure 3.
Figure 2—Accessing the Merger Settings in the System
Figure 3— Checking the Merger Activities Flag
You can also check the Merger setting in Table TF690 as shown in Figure 4.
Figure 4— Reviewing Table TF690
The next step is to verify the FS item role property being used in the FS item property for COI for this activity, since we will need to post to a Net Income Clearing account. Access this option in Figure 5 in the “Specify Miscellaneous Selected Items” menu in IMG and identify the FS Item Role as shown in Figure 6. Remember, FS item role is an FS item property used as a selection property.
Figure 5— Identifying the FS item role for Net Income Reclass Clearing Account
Figure 6— FS item Role required for Net Income Reclass for the Target
As part of the process, the system must understand that we will need to execute a Horizontal Merger activity. In order to know what Consolidation of Investment (COI) Activities the system recognizes in your current version, for HANA 2022 you must access IMG and review the Define Default Sequence of Activities menu as shown in Figure 7, and review the list shown in Figure 8.
Figure 7— Accessing the Define Default Sequence of Activities
Figure 8— Reviewing Activity 16 for Horizontal business combination and 24 Updating of Retained Earning Merger
As shown in Figure 8, SAP Group Reporting in HANA 2022 has multiple options. Yet for our case of Horizontal Mergers, only Activity 16 and Activity 24 are meaningful, and these activity numbers are used by the system to perform the activity-based postings for this scenario. Remember as shown in Figure 1, only activity-based COI will allow Horizontal Mergers with out-of-the box functionality. Also, Activity 24 – Updating Retained Earnings Merger is only used when the Absorbing Consolidation Unit (Italy in this example) is not a partner unit when we are in a Horizontal Merger.
Identify the Subitem value to be used as part of the posting. By default, the system uses 970 to identify the postings affected by Horizonal Mergers, if your system does not have the value of 970, please make sure your Transaction Types (Balance Sheet subitems) exist. To verify that the Subitem 970 exists in the IMG path shown in Figure 9 select the “Define Subitem Categories and Subitems” menu.
Figure 9— Accessing the Subitem Categories and Subitems menu.
As shown in Figure 10, the Subitem 970-Internal Merger exists, and can be used as a Merger Subitem.
Figure 10— Identifying Subitem 970 to be used in the Postings.
Access the Manage Consolidation Groups App as shown in Figure 11, and maintain the Target Entity, in this case Portugal PT00 and define the following:
- The Period of Divestiture, in this case Period 9.
- The Year of Divestiture, in this case Period 2026.
- Select BOTH checkmarks as shown in Figure 11. Notice in previous versions BEFORE HANA 2022 you might need to raise an incident with SAP for this checkmark to be shown activated in Table TF690.
Figure 11— Preparing the TARGET for Horizontal Merger in Manage Consolidation Groups App
Load the transactional data for all business units, including the business accounts and percentages of ownership. In this case, ES00-Spain owns 80% of both IT00 (Italy) and PT00 (Portugal) using the RUNIT field of PRC to reflect the Ownership percentage as shown in Figure 1 for the investment Financial Statement Item 172100 as shown in Table 1.
In this load, we are loading both the monthly activity for all Consolidation Units Italy and Portugal, along with the Group Transactions for ES00-Spain. As shown in Table 1, the field COIAC (Investment Activity) it is set up for 01 in both investments for IT00 and PT00, to identify the first Consolidation will be executed as any other normal month. Remember the Horizontal Merger will occur on Period 9, 2026. Remember, Figure 8 shows the Consolidation Activities, and 01 identifies as the First Consolidation.
Table 1— Loading Investment Ownership of ES00-Spain into the system for Period 008, 2026 (BEFORE Horizontal Merger on Period 9)
Now your activity data and the investment ownership has been created for the group using the Data Monitor. The Run Preparation of Group Change in the Consolidation Monitor task must be executed for Period 008, 2026 as shown in Figure 12 and 13 it is Period 008, 2026. After executing this step and based on the set up created in Step 5, the system is expecting the Horizontal Merger and Divestiture of the Target Entity Portugal to occurred in the following period or Period 009, 2026.
Figure 12— Executing in the Consolidation Monitor Preparation for Consolidation Group Change
Figure 13— Update Run for Preparation for Consolidation Group Change BEFORE Horizonal Merger on Period 008,2026
In the last period before Divestiture of the Target Consolidation Unit, execute the COI Task in the Consolidation Monitor as shown in Figure 14 and 15 must be run as shown. The results are displayed of a normal COI calculation for Period 008, 2026 in Figure 15.
Figure 14— Running the COI Task in the Consolidation Monitor
Figure 15— Running the COI task successfully in Period BEFORE Divestiture of the Target Entity (PT00- Portugal)
In the period of divestiture of the Target Entity, Portugal Balance Sheet will be absorbed by the Italian Entity. All this will occur in Period 009, 2026. For our example, the first adjustment that must be made is shown in Table 2. Notice that the IT100 has a 0 in MSL, and COAIC (Consolidation Activity) of 16 as discussed in Step 3. Also notice in Table 2 the Subitem 970 is now being used to inform the system that Horizontal Merger will occur on this period, and the ownership is being adjusted as well on MSL Field for 0 for IT100 Italy (absorbing Entity) and Negative 80 with COAIC 16 with the investment accounts for the Group ES00 Spain.
Table 2— Loading Horizontal Merger information for ES00-Spain Group for Period 009, 2026 by updating the Ownership structure with Subitem 970 and Consolidation Activity 16 (Horizontal Merger)
In addition, in the same file the Portugal PTO00 Activity now it must be assigned to Italy IT00 with Subitem 970 as shown in Table 3
Table 3— Loading Horizontal Merger information for ES00-Spain Group for Period 009, 2026 by updating the Ownership structure with Subitem 970 and Consolidation Activity 24 (Net Income Clearing) and Activity 16 (Horizontal Merger) for capital accounts.
Figure 16— Reviewing the Pre-Merger data loading using Data Monitor in Document Type 0Z for Period 008, 2026
Calculate Net Income/Retained Earnings in Period 009, 2026 as Shown in Figure 17.
Figure 17— Calculating Retained Earnings in Period 009, 2026
Once again, we need to execute the Consolidation Monitor in the Period 009, 2026 where the Horizontal Merger will occur. When the Preparation for Consolidation Adjustment task is run, the message shown in Figure 18 the system will inform you that Horizontal Merger is happening in this period, along with the total divestiture of the Target Consolidation Entity.
Figure 18— Running Preparation for Consolidation Group Change Task
At this moment, when running Net Income as the Parent of the Group ES00-Spain has acquired equity in PT00 Portugal (Target), the Parent has made a profit during this time. This Profit that belongs to ES00 must be reversed performing the following:
- Debit of Investment in Sub
- Debit n Net Income
- Credit of Issue Capital
- Credit of Retained Earnings.
- Reversal of Net Income Clearing, and the earnings effect that was originally posted on PT00 Portugal must be cleared from PT00, and book now to the investor ES00 Spain in Period 009, 2026.
To complete the Horizontal Merger, click on the Preparation for Group Change Task, and run once again the COI Task in the Consolidation Monitor to complete the Merger postings. Now the Balance Sheet items from Portugal (Target) have been included in the Balance sheet for Italy moving forward. As shown in Figure 19, after running the COI Task, and using Subitem 970 in the file loaded now the Balance Sheet items from Portugal will be included as Italy moving forward the Absorbing Consolidation Unit.
Figure 19— Italy absorbs Portugal Balance Sheet items with Subitem 970
Now if you notice in the Manage Consolidation Group App as shown in Figure 20 for the Period 009.2026, we can see the configuration of the Group Southern Europe (GRS00). Notice that Portugal (Target) PT00 the end of the assignment is end of 2026 Period 16, and it was Divested in Period 9, 2026.
Figure 20— Reviewing Consolidation Group options for PT00 Portugal for Period 009.2026
As shown in Figure 21, if you change the date to 001.2027, Portugal will no longer appear in the Consolidation Group hierarchy because generally it resides until the end of the year, and in the following period it will no longer appear. Now the Horizontal Merger has taken place, and Portugal will no longer exist since it has been fully divested, and Italy as the absorbing consolidation Unit will maintain the Balance Sheet Items from the target.
Figure 21— Portugal Consolidation Entity PT00 no longer appears in the Period 001.2027 in the Consolidation Group Southern Europe
This article contains quite a lot of new features delivered for SAP S/4HANA 2022 for SAP Group Reporting. M&A activity is a normal activity part of the life of large corporations, and thus this is just one example of the multiple alternatives available to manage financials and reduce the number of manual entries. It is important to clarify that, in SAP Group Reporting, only the activity-based COI Task will allow you to perform the configuration and postings shown in this article because rule-based COI does not support it. It is recommended to carefully evaluate Table 1 to determine which method will work best for your implementation. It is important to remember that in previous versions of SAP HANA the merger functionality required a special ticket. From HANA 2022 onwards, this is not required, so please take this into consideration.
There can be very complex group structures around M&A and information requirements depend on each corporation. It is important to get familiar with the full functionality of the SAP Group Reporting Consolidation of Investments (COI) and the very powerful solutions available to your company. Certainly, when help is required, feel free to reach out to Arellius Enterprises, and we will be more than delighted to assist in reviewing or implementing your M&A scenario. In summary, Horizontal Mergers can happen only within the same group, and the target entity Balance Sheet information will be reversed on the time of divestiture and included in the absorbing entity.