Capitalization and Valuation Allowances

Purpose

You use this component to uniformly perform capitalizations, valuation allowances, and divestitures for assets and liabilities in the consolidation system.

You can record fair value differences (surpluses and deficits) in noncurrent assets to trigger appropriate postings in consolidation of investments.

Note Note

To improve readability, the term asset stands for all assets and liabilities that are suitable for the functions described in this section (except when used in concrete examples).

The term valuation allowance stands for depreciation, amortization, writedowns, and writeups.

End of the note.

Implementation Considerations

You use capitalization and valuation allowances:

  • To post automatic standardizing entries for differences in valuations of financial statements between the corporate group and individual subsidiaries

  • To account for fair value differences in consolidation of investments

Integration

The Entity “Assets and Liabilities”

You can extend your data model with the new entity “assets and liabilities.” This provides the following functions:

  • You can maintain master data specific to this new entity (by means of manual data entry or automatic data collection methods such as flexible upload).

  • You can enter additional financial data for this entity. The additional financial data is automatically adjusted in the period initialization function.

  • You can extend the document database (journal entries) by this entity.

  • You can have the entity be posted when documents are posted manually.

Task Hierarchy and Task Sequence

Tasks for capitalization and valuation allowances (CVA) post with posting level 10 (standardizing entries) for each consolidation unit and each asset.

The task hierarchy can have one or more tasks of this category. You may want to have multiple CVA tasks:

  • To exclude certain assets from consolidation of investments

  • To record deferred taxes for only a certain portion of the assets

In the task sequence, period initialization must precede capitalization and valuation allowances. If the assets are carried in local currency only, a currency translation task must be performed after the capitalization and valuation allowances task.

Example Example

Example of a task sequence:

  • Balance carryforward

  • Period initialization

  • …

  • Capitalization and valuation allowances

  • Manual posting

  • Currency translation

  • Validation

  • …

End of the example.

For information about customizing CVA tasks, see Customizing for Capitalization and Valuation Allowances .

Relationship with Data Collection

You use manual data entry for assets and liabilities or automatic methods of data collection to record additional financial data and also master data required for capitalization and valuation allowances (in particular, fair value differences).

Relationship with Period Initialization

A period initialization task is required to automatically adjust the additional financial data for the new consolidation period (for example, with a periodic depreciation charge).

Features

In the capitalization and valuation allowances task, the automatic posting of documents is controlled by the master data and the additional financial data. Documents are posted for the following activities:

  • Capitalization of assets/liabilities with an option to record deferred taxes in the balance sheet

  • Valuation allowances (writeups and depreciation) of assets/liabilities

  • Retirements of assets/liabilities

Asset accounting data is included in each individual set of financial statements. When this occurs, the capitalization and valuation allowances task posts only the difference in valuations of financial statements between the corporate group and the individual subsidiary. (You record the additional financial data needed for this using manual data entry or automatic data collection methods).

The period initialization task calculates the depreciation charges for the difference. These charges are then posted in capitalization and valuation allowances.

You can have capitalization and valuation allowances post entries in local currency only or in both local and group currencies.

Thus, you have two alternatives:

  • You run capitalization and valuation allowances of assets and liabilities in both local currency and group currency right from the start.

  • You carry the assets and liabilities in local currency only and then run currency translation to translate the amounts into group currency.

Fair Value Surpluses and Fair Value Deficits

Fair value surpluses and fair value deficits (also known as hidden reserves and hidden contingencies) is a typical application for assets and liabilities. You can use the CVA task to record such fair value differences. A capitalization posts the fair value differences directly to the original value item, and posts the offsetting entry to the appropriation item ( Appropriations for Assets ).

The parameters used for depreciation only apply to fair value differences (not to the total fair values including the differences). These parameters conform to the group valuation and can be entered in the master data.

Consolidation of investments uses these postings when calculating goodwill and minority interests in net income/retained earnings.

  • Fair value adjustments reduce the amount of goodwill when goodwill is calculated in first consolidation: the higher the fair value difference, the lower goodwill becomes.

  • Valuation allowances of fair value differences become part of subsequent consolidations.

Constraints

Capitalization and valuation allowances of assets and liabilities does not include currency translation. How you arrive at values in group currency depends on the settings in the master data of the asset.

See Dependencies of Customizing on Which Currencies Are Carried .

Example

See Examples of the Posting Logic .