If you are defining several company codes for each legally independent unit, you should bear the following in mind:

• You can define several company codes for a single legally independent unit, if it makes sense to treat enterprise units within a legally independent unit as if they were legally independent units themselves. This may be appropriate for example if you plan to split the company code into parts for legal purposes.
• Note: You can only create a true customer-supplier relationship (one that includes the creation of purchase orders, customer orders, bills and other documents) between company codes. If you want to set up a customer-supplier relationship, you must ensure that each enterprise unit within a legally independent unit is represented by its own company code.
• You cannot use transfer prices within a company code. If you intend to use transfer prices between the enterprise units of a legally independent unit, you need to set up a separate company code for each enterprise unit. From Release 4.0 onwards, you can use transfer prices for the movement of goods between profit centers.
• To create reports that are required by law, you need to summarize information from the different company codes involved (consolidation). Consolidation fulfills these legal requirements for the enterprise’s financial statement. However, debit and credit concentration does not take place.
• If you use transfer prices between different company codes within a legally independent unit, you must eliminate any interim profits that accrue before you create reports (consolidation).
• If you use several company codes then you must maintain master data and customizing settings for each one.
• Different company codes can have different logistical structures. Setting up several company codes within one legally independent unit will therefore affect the setup of units such as plants or sales organizations.
• In some cases, mid-year reports (foreign trade regulations, amalgamated reports) that deal with several company codes need to be revised or compiled manually.
• If you make a mid-period change to material valuation in only one of the company codes within a legally independent unit, you may end up with different valuation approaches within that unit. This is not permitted under commercial law.

By definition, the company is the legally independent unit that, according to commercial law, must create the individual financial statement. The company’s financial statement is also the basis for the consolidated financial statement. The consolidation that companies within a group carry out (legal consolidation) generates this consolidated financial statement.

What exactly is a consolidation of company codes? Usually each legally independent company is represented by exactly one company code. However, a company code may also represent legally independent business premises particularly if these premises are located in a different country, and are thus subject to different currency and legal requirements.

Provided all the company codes for the company are managed in one R/3 System, the process of aggregation can be simplified. You may be able to create the company financial statement without necessarily performing company consolidation; assigning an independent company to each company code; and creating individual financial statements for each company using the subgroup entity in the consolidation reports system.

This simplified method is however subject to certain constraints. The procedure is as follows:

• You assign each company code to exactly one company.
• These company codes are posted to the consolidation processing ledger and automatically summarized for the company
• The company currency is established as the ledger currency using the concept of parallel currencies.
• Report writers and consolidation report systems can evaluate the posted values directly.

However, there is no elimination of payables and receivables, or of intercompany profits. You should therefore ensure that transactions between premises are posted to intercompany clearing accounts, rather than as payables and receivables, to achieve the elimination effect as a net balance.

Intercompany profits can often be avoided, or entered manually as summary correction postings in the consolidation processing ledger. For currency translation you need to choose between the spot exchange rate (determined during through-posting) and the historical rate. This is possible using the currency translation program in consolidation.

Note that this procedure does not fulfill all the requirements for an individual financial statement from consolidation; it simply allows you to create a balance sheet and an income statement.

Other requirements pertain to FI reporting, which triggers them during cross-company valuations. Cross-company or cross-currency financial statements can also be created with the FI financial statements program. There are however constraints to this FI program for example, when different currency conversion methods are used, or simply when there are eliminations to be carried out. In such cases, it is preferable to use the consolidation tools.