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Introduction To Financial Consolidation – SAP BPC

Introduction to Financial Consolidation:

One of the greatest appeals and main functionalities of SAP BPC 10 is its capability to perform activity in the legal financial consolidations. Now, let us get to know exactly what it means and about financial consolidated results.

One of the main reasons why to consolidate the results is in order to track the company’s performance and provide that data to people. It can be a consolidated report to internal management teams, external regulators or even the accounting department groups. Financial consolidation has a very complex set of rules and regulations in internal accounting standards that come from internal accounting groups. Before going deep into the financial consolidations, we have to look at few other areas as well:

Entity Trial Balance:

One of the most basic informations or data that is required for the legal consolidation is its entity trial balance. As all we know, a trial balance can hold all the recorded information on the entities’ records and books that are required to perform the financial consolidations. 

The trial balance of every entity comes from the system of general ledger. The system of general ledgers normally go within a data warehouse and feed into the system of BPC that contain relevant information that are required for financial consolidations. The general ledger system also has complete information about the bank details right from bank account number, cash balance etc. In general, the information is often aggregated up to the next level that is very essential consolidations in the business warehouse of all the detailed information. However, in the general ledger system, all the entities don’t exist. But, it is fair enough to have a trial balance which is just financial information that can be put directly to the BPC system. As far as all the necessary information is captured, it is not mean and not an important thing where the trial balance comes. The user has to remember a trial balance is the basic level information.

Currency Translation:

Let us move right into source data. One more step that is required to be taken is currency translation. The currency translation is defined as a process of standardizing information / data from every individual trial balance in various currencies into the common reporting currency. In any of the businesses there is a chance of many subsidiaries which operate in various areas of the world. These subsidiaries’ trial balance is most likely in several currencies. There should be consolidated results that we have to standardize in various trail balances into a single currency. In this way while the balances come together it’s not really adding oranges and apples combinely. The reporting currency can be any of the currencies but it also must reflect the currency that is required for the reporting. In addition, it is very essential to have a note at which the exchange rates are used to reflect the local currency entities to the reporting currency.

The entire process of currency translation will translate each and every individual trial balance into the currency reporting. Moreover, there are many specific rules and regulations to follow in translation currency. The regulatory bodies all around the globe may need various ways for translating several types of balances.

Take an example here: It is very normal for loss or profit accounts (both income & expenses) should use the average rates of a current time period during the currency translation. In addition, the asset account should use the rate of the ending spot.

Intercompany Elimination:

So far, we have all the trial balances in a single reporting currency. Now, we have to add it all and have to do it right? Also, we have to look into the intercompany transactions. Intercompany transactions often happen between the entities which belong to the overall organization / company. These transactions can happen between two subsidiaries of the current parent company and its subsidiary and vice versa. One of the main points is, all these transactions must be taken in the process of consolidation, it is because the company doesn’t do anything more than the move from one place to another place. 

Elimination of Investments:

There is one more specific type of translation which is called equity elimination of investments. When there is a product between two entities, then there is a chance of taking place of these entities because of its business. Let us say a father in a house has $1000 and he gave $500 to his son which in turn the son makes $100 profit from it. Actually, speaking we don’t care about the money transactions between a father and son, but care about the profit of $100. Hence, this is the way the investment parent companies need to be eliminated in the process of consolidation. The entire process looks very easy but it becomes very complex if there are multiple subsidiaries and multiple investors. 

Equity Income Calculation:

Let us now standardize all the eliminated and trial balances of the transactions that belong to intercompany, one might think, what is the other thing to do? There are many rules and regulations on how to make accounts of the subsidiaries mainly when there is a joint venture.

Non-Controlling Interest Calculation: 

The non-controlling interest calculation is very similar to equity income which is indeed essential while performing the process of consolidation. The non-controlling interest is considered when a company / organization has its own control and subsidiary.

Balance Carry Forward:

The last and final consideration for the consolidation process is balance carry forward. It can be done every year on the basis of previous year records and books while enabling the opening balances. In this way while the balances come together it’s not really adding oranges and apples combinely. The reporting currency can be any of the currencies but it also must reflect the currency that is required for the reporting. In addition, it is very essential to have a note at which the exchange rates are used to reflect the local currency entities to the reporting currency.

Conclusion:

Hope this article helps you know the detailed insights about financial consolidation – SAP BPC. Still, you have any queries, contact: Geologica training or comment your queries in the below section.

January 30, 2021
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