Proportionate Consolidation

Purpose

This component enables you to include consolidation units proportionately in your consolidated financial statements according to generally accepted accounting principles (GAAP) or other corporate accounting policies.

In contrast to the purchase method, the proportionate method of consolidation collects the items of a unit’s financial statements corresponding to the investor unit’s percentage of ownership in the investee unit, rather than at their full amounts.

Implementation Considerations

You use the proportionate method of consolidation in the following situations:

  • In company consolidation when accounting principles require you to (or you opt to) proportionately consolidate a joint venture company (instead of using the equity method)

    Joint venture companies are typically owned by two parent companies at 50% each.

  • In business area consolidation or profit center consolidation when you do not want to use the equity method

  • In matrix consolidation (for example, with consolidation units for companies and profit centers) when you do not want to use the equity method

For more information about applying the proportionate method of consolidation according to the different accounting principles, see:

Integration

You use reclassification tasks to assist you in carrying out proportionate consolidation. The example below shows a possible sequence of tasks. The Features section below describes when you need to use reclassification tasks to perform apportionments.

Example Example

In the consolidation monitor, the sequence of tasks might look like this:

  • Balance carryforward

  • Period initialization

  • Collection of reported financial data

  • Validation of reported financial data

  • Reconciliation for interunit payables/receivables

  • Reconciliation for interunit revenue and expense

  • Reconciliation for investment income

  • Standardizing entries

  • Currency translation and rounding

  • Reclassification: Apportionment of standardized financial data

  • Elimination of interunit payables and receivables

  • Reclassifications: Two-sided eliminations

  • Elimination of interunit revenue and expense

  • Reclassifications: Two-sided eliminations

  • Elimination of investment income

  • Reclassification: Two-sided eliminations

  • Consolidation of investments

  • Reclassification at posting level 30 (reclassification of minority interests and statistical items)

  • Validation of consolidated financial data

End of the example.

Features

You collect (or enter) the reported financial data, additional financial data, and standardizing entries in full amounts.

You configure the system to proportionately include consolidation units with the aid of automatic reclassification entries. You post these entries at the following points:

  • Either after collecting the reported financial data or after posting standardizing entries (if the reported data is standardized)

  • After the following consolidation tasks:

    • Interunit eliminations:

      • Elimination of interunit payables and receivables

      • Elimination of interunit revenue and expense

      • Elimination of investment income

    • Elimination of interunit profit/loss in transferred inventory (two-sided)

    • Consolidation of investments (C/I)

      (one reclassification task before, and one after, the C/I task)

      Between one and four reclassification tasks are needed after each consolidation task listed above.

For each individual consolidation group, you record the proportionate share for a consolidated unit and any proportion changes by posting transaction data to statistical items. The system then posts the reclassification entries using the percentage rates defined in the statistical items.

You can use the following functions:

  • The system posts the data resulting from proportionate consolidation to the suitable posting levels:

    • Reported or standardized financial data (including entries for capitalization and valuation allowances) is posted to posting level 12.

      (standardizing entries: consolidation group changes)

    • Two-sided elimination entries are posted to posting level 22.

      (two-sided elimination entries: consolidation group changes)

    • Data resulting from consolidation of investments is posted to posting level 30.

  • If a consolidation group has more than one proportionately-consolidated unit, you can use the following functions for all two-sided eliminations:

    • You can choose between the product procedure and the minimum procedure .

    • You can reclassify the remainder of the interunit profit to “Third Parties.”

  • You can change the proportionate share for a proportionately-consolidated unit.

  • You can have multiple consolidation groups include the same consolidation unit using different accounting techniques (purchase method, proportionate consolidation, or equity method).

  • You can change the accounting technique from purchase method to proportionate consolidation, and vice versa. Similarly, you can change the accounting technique from proportionate consolidation to equity method, and vice versa.

Constraints

Proportionate consolidation has the following limitations:

  • Elimination of interunit profit/loss in transferred inventory:

    No reclassification methods are provided for the apportionment of data that takes supply chains (posting level 30) into account.

  • Elimination of interunit profit/loss in transferred assets:

    No reclassification methods are provided to apportion data that has been created by tasks for eliminating interunit profit/loss in transferred assets.

  • Elimination of investment income and consolidation of investments:

    Investor units cannot be proportionately consolidated. The system proportionately consolidates only investee units that are not simultaneously investor units.

  • Sequence of activities in consolidation of investments:

    Partial divestitures must precede subsequent consolidations.

  • Rounding:

    Customer-defined rounding rules that are fulfilled after currency translations might be violated after a reclassification task for apportionments. (However, one exception exists: The “assets = liabilities” rule is always fulfilled after such a reclassification task.)