Elimination of Interunit Profit/Loss in Transferred Inventory 

Purpose

Current assets, typically inventory items, are sold within consolidation groups (for example, corporate groups). These transactions lead to interunit profits or losses.

You can use this component to automatically eliminate interunit (IU) profits and losses. This elimination can be a statutory accounting requirement or a policy of management accounting for the group, either or both of which require that the consolidated statements portray the group as if it were a single entity.

The following prerequisites must be met to use this component:

·       Interunit profit or loss requiring elimination has been recorded in your group as a result of the sale of inventory.

·       The consolidation units involved in the sale are included in consolidation.

·       The consolidation group still owns all or part of the asset that was sold within the group as per the date of consolidation – that is, it has not been fully sold to a third party.

Implementation Considerations

Implement this component if you want to eliminate IU profit/loss resulting from inventory transfers by means of automatic posting.

Features

Calculation Base for Interunit Profit/Loss

The elimination of interunit profit/loss in inventory is based on data about:

·       The inventory-managing consolidation unit and

·       The supplying consolidation unit

A trading relationship exists between such a pair of consolidation units. The system uses product groups when reconciling the inventory data with the supplier data of those units.

Calculation and Posting of Interunit Profit/Loss

The interunit profit/loss is calculated as follows:

Calculated		Location of Data
	Book value of the asset	Additional financial data
-	Group cost of goods manufactured	Additional financial data
=	Interunit profit or loss

Valuation allowances may already be accounted for in the interunit profit/loss.

The system eliminates the interunit profit/loss as follows:

·       If the difference reflects an IU profit – that is, the difference is positive – then the system makes an adjustment to match the lower value, in this case, the group COGM. The group records the lowest value.

·       If the difference reflects an IU loss – that is, the difference is negative – then the system makes an adjustment to match the higher value – in this case, the group COGM.

There is no requirement to automatically post interunit losses.

The following is achieved by the automatic postings:

·       The asset is adjusted by the amount of the interunit profit/loss.

·       The offsetting entry can be posted either to an income statement item (standard procedure) or to a balance sheet item.

·       At the same time, the system adjusts retained earnings and/or annual net income.

·       The system posts deferred taxes to the profit adjustment item (optional).

·       You can transfer the distribution costs to an item you specify – for example, cost of goods manufactured.

·       Furthermore, you can record currency translation differences that are incurred in the elimination of interunit profit/loss.

Two-Sided Supply Relationships and Supply Chains

The component not only portrays supply relationships between two units within a consolidation group. It also portrays supply chains that span multiple pair relationships.

Different Accounting Techniques

The elimination of interunit profit/loss in transferred inventory treats consolidation units according to their accounting technique. The following accounting techniques are supported:

·       Purchase method

·       Equity method

·       Equity method for nonconsolidated units
(These are consolidation units, whose upper units [investors] have a controlling interest, but are nevertheless merely included using the equity method in consolidation of investments.)

Posting Level

If you only want to account for two-sided relationships and only want to consolidate units using the purchase method, then you use a document type that posts to posting level 20 (two-sided elimination entries).

However, if you want to account for supply chains or you want to consolidate units using the equity method, then you need to use a document type that posts to posting level 30.