Advanced intercompany processes & the concept of transactional consolidation (With UPA)

[PreethaB]

The first part of the blog series introduced the concept of parallel accounting and more specifically “Universal Parallel Accounting”. I'd like to bring it to your attention here: From Parallel Accounting to Universal Parallel Accounting

We focused on a specific use case involving parallel accounting from the group's perspective, where parts of the production process are carried out in different countries or legal entities to achieve economies of scale. When analyzed from the perspective of the company buying or selling the intermediate (finished) product, it is simply an intercompany sale/purchase process with a mark-up added to the product. However, from the Group/HQ’s perspective, there are two additional requirements: obtaining a detailed cost component breakdown, even after the product has crossed borders, changed material codes, or had value added to it; and ensuring a margin-free valuation of the final product.

A quick recap of the example used in the first blog with valuation from legal and group perspectives:

In this second blog, we'll explore how advancements in logistics processes, particularly the improvements in advanced intercompany processes, affect "Finance." There are several excellent articles detailing "Advanced intercompany flows," one of which I highly recommend: Advanced Intercompany Sales & Stock Transfer in SAP S/4HANA Cloud. In this post, my focus will primarily be on the financial implications.

Referring to our example: there are two intercompany processes at play:

1. The first part of the production process occurs at Plant 1010 in Germany. The partially processed material (ZPREETHA_FG_01) is then transferred to Plant 1710 in the USA for further processing, resulting in the transformation to ZPREETHA_FG_02. From a logistics standpoint, this can be efficiently managed using the new and improved "Advanced Intercompany Stock Transfer" process within SAP S/4HANA.
2. The German affiliate sells the finished product to a customer in the US. Since the material is produced by the US affiliate at Plant 1710, the plant 1710 directly delivers the product to the customer. Some customers refer to this as a "triangular flow", while in SAP terminology, this is known as the new and improved "Advanced Intercompany Sales process."

I will focus on the "Advanced Intercompany Sales Process" and explain the concept of transactional consolidation by analyzing the accounting impacts. I will also highlight how this process addresses the needs of both plant controllers and group controllers.

Let’s proceed step by step:

1. Sales to Final Customer:

Legal entity 1010 in Germany creates a sales order for a customer in the US, with plant 1710 in the US designated as the delivering plant. Technically, the sales area of the selling plant must have access to delivering plant 1710 to facilitate deliveries from an affiliated company. A new field, the transit plant, is used to define the plant for valuated stock in transit postings within the sales order.

Intercompany sales and purchase orders are automatically generated when the sales order to the final customer is saved. This is accomplished through the Value Chain Monitoring framework. To trigger the automatic creation of intercompany documents (both purchase orders and sales orders), the sales order type and item category must be configured to support the advanced intercompany process (e.g., sales order type = OR and item category = TAN).

Additionally, it is necessary to configure the sales order type and item category for intercompany sales orders, as well as the purchase order type for intercompany transactions. Furthermore, plants and company codes must be set up as business partners (ship-to, payer), which we will see later when analyzing the postings.

2. Delivery to Final Customer:

The outbound delivery is created for the final customer and the goods are shipped from the plant 1710 in the US. Upon posting the goods issue from the outbound delivery document, the following goods movement records are automatically generated:

• From the delivering company side:
  • Goods transfer from storage location to valuated stock in transit (GIOD)
  • Goods issue from valuated stock in transit (GIFV)
• From the selling company side:
  • Goods receipt into storage location (GRTS)
  • Goods transfer from storage location to valuated stock in transit (GIFS)
  • Goods issue from valuated stock in transit (GITC)

These goods movements are automatically posted based on two new fields in the delivery document: the internal and external transfer of control dates. The Value Chain Monitoring Framework executes these automatic goods movements via scheduled jobs according to these dates.

Let’s now examine the accounting scheme for each of the accounting documents.

Goods transfer from storage location to valuated stock in transit (Delivering Company):

As the first step, a special stock indicator is assigned to the stock, enabling the transfer of goods to valuated stock in transit.

In the leading ledger 0L, the posting is based on legal valuation with an intercompany mark-up:

In the group ledger 4G, the posting is based on the group valuation without any intercompany mark-up:

Goods issue from valuated stock in transit (Delivering Company):

The second goods movement represents the cost of sales posting from the US affiliate to the German affiliate. 

In the leading ledger 0L, the posting is based on legal valuation with an intercompany mark-up:

Additionally, in the market segment view, the German affiliate is identified as both the sold-to and bill-to party. However, the final customer in the US is designated as the ship-to party.

In the group ledger 4G, the posting is based on the group valuation without any intercompany mark-up.

In addition to this margin-free valuation in the group ledger 4G, a reversal of the Cost of Goods Sold (COGS) is also posted, with the “Group Valuation Clearing Account” serving as the offsetting account. This reversal posting sets the stage for what we call as “transactional consolidation”.

Goods Receipt into storage location (Selling Company):

This document represents the Goods receipt posting in the selling company, the German affiliate 1010.

In the leading ledger 0L, the posting is based on legal valuation with an intercompany mark-up:

The price difference of 66,6 $ is due to currency translation. This is demonstrated below: the exchange rate type M is used for average rate conversion, while exchange rate type P is utilized for planning or standard cost calculation."

In the group ledger 4G, the posting is based on the group valuation without any intercompany mark-up.

The amounts in the Accounts Receivable (AR) and Accounts Payable (AP) accounts are identical, with the values in the Price Difference (PRD) account attributable to differences in exchange rates.

Goods transfer from storage location to valuated stock in transit:

A special stock indicator is then assigned to the stock, enabling the transfer of goods to valuated stock in transit.

In the leading ledger 0L, the posting is based on legal valuation with an intercompany mark-up:

In the group ledger 4G, the posting is based on the group valuation without any intercompany mark-up:

Goods issue from valuated stock in transit:

This document represents the Goods issue posting in the selling company, the German affiliate 1010.

In the leading ledger 0L, the posting is based on legal valuation with an intercompany mark-up:

Additionally, in the market segment view, the final customer in the US is identified as the sold-to, bill-to and ship-to party for the German affiliate.

In the group ledger 4G, the posting is based on the group valuation without any intercompany mark-up.

From the perspective of the German affiliate, the transaction is as a direct material purchase. Consequently, the detailed cost component breakdown should reflect this as a “direct material” purchase. This is shown in the posting in the leading ledger 0L for the COGS split.

However, from the group perspective, we will have a detailed breakdown of the cost components, excluding any intercompany margins. This can be seen in the COGS split posting in the group ledger 4G

This is how SAP addresses the needs of a corporate or group controller who needs to analyze a detailed cost component breakdown without any intercompany mark-up, even after the product has crossed borders, changed material codes, or had value added to it.

3. Invoice to Final Customer & Invoice to intercompany customer:

After generating the outbound delivery, the final customer invoice can be created. There is no prescribed order for this process: the final customer invoice and the intercompany sales invoice can be created simultaneously and independently of each other.

When the intercompany sales invoice is created, it automatically generates the intercompany vendor invoice through the Value Chain Monitoring Framework.

Let’s now examine the accounting scheme for each of the accounting documents.

Invoice to Final customer from the German Affiliate:

Posting in the leading ledger 0L:

In the market segment view, the final customer in the US is identified as the sold-to, bill-to and ship-to party for the German affiliate.

Posting in the group ledger 4G:

Intercompany Customer Invoice:

Posting in the leading ledger 0L: (based on the valuation in the material master)

In the market segment view, the German affiliate is identified as both the sold-to and bill-to party. However, the final customer in the US is designated as the ship-to party, similar to what we have seen in the Goods Issue document

Posting in the group ledger 4G:

When we posted the Cost of sales, there was a reversal of the amounts in COGS account with “Group Valuation Clearing Account” being the offsetting account. Similarly, the intercompany revenue is also reversed in the intercompany customer invoice with the “Group Valuation Clearing Account” serving as the offsetting accounting. This process effectively reverses both intercompany COGS and intercompany Sales, resulting in an inherent “transactional consolidation” within our Profit and Loss (P&L) statement.

When discussing about "transactional consolidation" in this blog, I primarily focused on the Profit & Loss (P&L) statement. These concepts hold significant value for controllers and CFOs who require a real-time view of their sales and margins, rather than waiting until the end of the period. This also aligns with our "continuous accounting" narrative in our SAP S/4HANA pitch for Finance.

While the blog centers on management accounting, consolidation from a statutory perspective involves additional complexities, such as understanding the ownership structure and consolidating figures accordingly. This is where our consolidation solution, "Group Reporting," comes into play.

To learn more about this, I highly recommend the following blogs:

Tight Accounting Integration:

https://blogs.sap.com/2022/01/31/sap-s-4hana-cloud-for-group-reporting-2202-is-live/

Value Chain Insight and Integration Group Reporting:

https://blogs.sap.com/2022/10/10/insights-into-value-chain/

And finally, in the third part of the blog series, I shall discuss how Intercompany Matching and Reconciliation (ICMR) facilitates the matching and reconciliation of intercompany balances before consolidating figures in Group Reporting. I will demonstrate how our built-in solution streamlines this process, eliminating the need for complex Extract, Transform, Load (ETL) procedures. This integrated approach ensures that any latencies associated with intercompany transactions are effectively eliminated.