Learn how to split intercompany elimination differences using SAP Enterprise Controlling Consolidation System (EC-CS) and thus accelerate the closing process.
SAP’s intercompany elimination feature allows elimination of trading partner relationships within a corporate group in preparation for consolidated group financial statements. Trading partner relationships commonly occur between units of a corporate group to account for exchange of goods and services. The units may be parent and subsidiary, two subsidiaries, two divisions, or two departments of one entity. Typical trading partner relationships that need elimination are payables and receivables, revenue and expense, investment income, and purchase and sale of assets.
Companies often want to separate currency-related elimination differences from other elimination differences during a month-end closing. This process is often required in preparation for consolidated financial statements for statutory or operational reporting. In the absence of an automated process, accounting or reporting managers can find the manual breakdown of elimination difference into currency-related differences and other differences to be time-consuming. Automating this process not only accelerates the financial close process but also eliminates the chances of manual introduction of inaccuracy in financial statements. I show you out-of-the-box functionality in SAP Enterprise Controlling Consolidation System (EC-CS) that allows you to accomplish this process. (This functionality comes delivered in EC-CS as part of the accounting module.)
Common Reasons for Elimination Differences
Intercompany transactions can lead to misinterpretation of consolidated financial statements; thus, they should be eliminated from consolidated financial statements. The process of intercompany elimination between trading partners may result in elimination differences. These elimination differences could stem from a variety of sources. Some notable sources leading to elimination differences are:
- The trading partners post intercompany transactions in different periods. For example, an intercompany payable transaction for $10,000 is booked by Partner A in June 2011 and an intercompany receivable transaction for $10,000 is booked by Partner B in July 2011. Consequently, an intercompany difference of $10,000 would result when intercompany elimination is run for June for the two trading partners.
- The trading partners may be using different methods of accounting, and they may record the trading partner activity differently, leading to differences during elimination.
- One of the trading partners makes an error in posting.
- Exchange rate fluctuations when functional currency of the trading partners is not the same. The trading partners may book an intercompany transaction in the transaction currency, but report the transaction in a different group currency for consolidation. Differences could result in such group values owing to exchange rate fluctuations even when the amount booked in the original transaction currency was the same.