Statutory Consolidations in HFM

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Statutory Consolidations in System 9

Financial Management

Created by: Danny TijerinaAdvanced Technology Group



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Table of contents:

Introduction:.....................................................................................................................3Ownership:.......................................................................................................................5

Organizational hierarchy:.............................................................................................5

Entity Attributes:..........................................................................................................5Direct method of entering ownership: .........................................................................6

Find System generated accounts:..................................................................................7Indirect method of entering ownership:.......................................................................8Calculate Ownership:...................................................................................................9

Direct v. Indirect Method:..............................................................................................10Consolidation Methods:.................................................................................................10

Direct method of entering consolidation method: .....................................................12Account Attributes:....................................................................................................13

Custom Consolidations:.................................................................................................14

Default Consolidation rule:........................................................................................15Equity Method: ..........................................................................................................16

Subsidiary Method:....................................................................................................17Holding Method:........................................................................................................18Default Elimination rule: ...........................................................................................19

OWN20 Equity Pickup:.............................................................................................20OWN80 Minority Interest:.........................................................................................22

Equity and Investment Elimination: ..........................................................................24Consolidating Balance Sheet: ....................................................................................27Check list for Building a Statutory consolidation application:..................................28



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Introduction:

The purpose of this white paper is to explain the process and setup of StatutoryConsolidations in System 9 Financial Management.

Statutory consolidations are a normal part of the process in large multinational

organizations. The need to account for complex organizations, such as partial ownershiprequiring the calculation of minority interest or partial ownership requiring equityaccounting rules, is a growing requirement. The following will explain the metadata

setup and business rules necessary to meet these requirements.

A Subsidiary is a company owned by another company through the ownership of voting

stock. A company that owns a majority of voting stock and has controlling interest in

another company must include the assets and liabilities of the owned company in its own balance sheet.

Minority I nterest must be calculated and recorded on the balance sheet of a company that

owns a majority interest, more than 50 percent but less than 100 percent, of anothercompany. Minority interest is a liability owed to the minority owner or owners. For

example: a company that owns 90 percent of another company must record a 10 percentminority interest on its balance sheet. The offset to the balance sheet entry is an expense

to reduce the net income by the percentage owned by the minority stockholders.

Equity method is for an Entity held, with less than 50% interest but at least 20% interest,

and is NOT consolidated. The Net Income of the Entity is multiplied by the Equityholding and the result is booked to the P&L and Equity Holding (Balance Sheet Equity

Investment) of the Holding companies books.

Cost method is for an Entity held, with less than 20% interest, and is NOT consolidated.

The Net Income of the Entity is multiplied by the Cost holding and the result is booked tothe Holding companies Balance Sheet in Other Investments. There is no P&L impact.

Holding companies hold the Investments of other entities. The Holding CompaniesEquity L IVES and is not eliminated until its parents equity is eliminated.

[PCON] is a system generated account to hold the percent for consolidation. The defaultis 100%.

[POWN] is a system generated account to hold the percent for ownership. The default is

100%.

[SharesOwned] a system generated account to hold the number of shares owned. The

default is 0. This controls the percent owned and percent consolidated.



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[SharesOutstanding] a system generated account to hold the number of shares

outstanding. The default is 0.

[VotingOwned] a system generated account to hold the number of voting shares owned.

The default is 0. This controls the consolidation method.

[VotingOutstanding] a system generated account to hold the number of shares

outstanding. The default is 0.

[Method] system generated account for input of consolidation method.

[System] is a system generated member list for accounts containing the above accounts.



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Ownership:

The following examples will explain the consolidation of subsidiaries that are owned

100%, 80% and 20%. The subsidiary method (100%), subsidiary method with minorityinterest (80%) and equity method (20%) will be used. There is no example for the Cost

method.

Organizational hierarchy:

Holding Company – Holds investment

OWN80 – Full consolidation with 20% minority interest

OWN20 – Non consolidated subsidiary with 20% equity pickupOWNALL – Full consolidation with equity elimination

Entity Attributes:

As described above, the Holding company holds an investment in other companies.System 9 Financial Management provides an attribute setting in the Entities module to

declare a holding company. This feature allows the user to take advantage of built infunctionality for complex consolidations.

Note: The Holding company designation is entered at the parent level. Each parent can

only have one designated Holding Company.



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Direct method of entering ownership:

When entering ownership information you can use the “Ownership Management” page.

The Parent Company is represented by the point of view Entity and the Subsidiaries areits children. This is the direct method of inputting data directly to accounts [POWN] and[PCON] .

Note: When entering [PCON] and [POWN] data the default is 100%.

Display options for “Ownership Management ” page:



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Find System generated accounts:

Note: To find the System generated accounts, such as “[PCON]” or “[ SharesOwned]”

you must select the system generated account list “[System]” .



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Indirect method of entering ownership:

When entering ownership information the relationship between Subsidiary and HoldingCompany is created in data grids. The Holding Company is represented by the “ICP”

member and the Subsidiary is represented by the point of view entity. This is the indirectmethod by inputting data to account s “[SharesOwned]”\”[VotingOwned]” and“[SharesOutstanding]”\”[VotingOutstanding]” .

Note : In order to use this method the Subsidiary entities must be flagged as “IsICP” .Total outstanding is entered into “[ ICP None]” . Shares owned by other entities areentered into the respective “ICP” member.

Once data is input into the “[SharesOwned]”/”[VotingOwned]” and

“[SharesOutstanding]”/”[VotingOutstanding]” accounts, The amounts for “[PCON]” ,“[POWN]” , “[PCTRL]” and the Consolidation “[Method]” can be calculated in the“Ownership Management ” page within “Data Task” in the Financial Management web

interface.

The ownership calculations are based on the Consolidation Methods in the metadata.



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Calculate Ownership:

To calculate ownership, click on the “Calculate Ownership” button on the “Ownership

Management” page within “Data Tasks” .

Once in this screen you can select the parameters for calculation.

Periods – The individual periods of you application

Percent Contr ol – Calculate the percentage value for account [PCTRL]

Consolidation Method – Calculate the value of “1” for the account [Method] and

appropriate Custom1 member for type of method

Percent Ownership – Calculate the value for account [POWN]

Percent Consoli dation – Calculate the value for account [PCON]

Di rect Percent Ownership – Calculate value for account [DOWN]

Entities – Selection of entity to be calculated



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Direct v. Ind irect Method :

When deciding whether to use the Direct Method or the Indirect Method for ownership

the main considerations are as follows:

o How many entities are involved?

o Does the ownership change often?o Are you calculating ownership manually in a spreadsheet?

If you only have a few entities involved for ownership purposes the Di rect Method is

easy and straight forward. If you have a lot of entities involved for ownership purposesthe I ndirect Method might be more efficient for the following reasons:

o Share information can be loaded through a data fileo Calculating ownership is more efficient than manual entry

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Calculating ownership is more consistento Manual entry lends itself to errors

Conso l idat ion Methods :

ConsolM ethod – Defines the name of the method, the name must be unique and can

contain up to 20 characters.

Description – Specifies the description for the consolidation method. The description

can contain up to 80 characters, including spaces, and cannot use an ampersand (&).

UsedByCalcRoutine – Specifies whether the method is used for the automatic ownership

calculation routine.

IsHoldingMethod – Specifies whether the consolidation method is used for the holding

company. This attribute is optional.

ToPercentControlComp – Specifies whether the upper boundary of the range of the

percent control is included in the range. If the UsedByCalcRoutine attribute is not

checked this field is optional.

ToPercentControl – Specifies the upper boundary for the range for Percent Control.

Used for the ownership calculation routine. Specify a value between 0 and 100.



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PercentConsol – Specifies the consolidation percentage applied by the ownership

calculation routine. Specify a value for the percent (such as 100) or one of the following

keywords:? POWN – Percent ownership

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POWNMIN – Minority share of percent ownership

Control – Specifies the threshold that corresponds to the type of control used by the

calculation routine. Specify one of the following:

? Blank

? No

? Limited

? Full

Note : One of each type of Control must be used when creating ConsolMethods .



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Direct method of entering consolidation method:

When entering consolidation methods you can use the “Ownership Management” page.The Parent Company is represented by the point of view entity and the Subsidiaries areits children. The consolidation methods added in the metadata for “ConsolMethods” are

listed in a drop down menu.

ConsolM ethods in metadata:

Drop down menu in “Ownership M anagement” :



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Account Attributes:

Custom consolidation rules are based on a combination of designated accounts andconsolidation methods. Accounts are designated with a “User Defi ned” attribute within

the metadata.

In this instance the UD3 attribute is “INVEST” for the INVESTINSUB account.

In the application used for this demonstration the UD3 attributes for accounts are as

follows:

Account UserDefined3

INVESTINSUB INVEST

COMSTOCK EQUITY

PIC EQUITY

RECUR NETINC

Note : Accounts “COMSTOCK” and “PIC” have the same “UserDefined3” attribute

because they are treated in the same way.



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Custom Consol idations:

When using custom consolidation rules you must create the default consolidation and

intercompany elimination rules. This must be done because when the“ConsolidationRules” flag is activated for an application the default consolidation and

intercompany elimination rules become invalid.

Consolidation rules are created using an Open Data Unit. (For further explanation seewhitepaper on Open Data Unit)

To begin the process variables are set for ease of use:

POwn = HS .Node.POwn("") – Percent Ownership for minority interest calculation

Parent = HS .Parent.Member – Parent of the current entity being processed

Holding = HS .Parent.Holding(Parent) – Holding company of the current parentEntity = HS .Entity.Member – Current point of view entity being processed

PCon = HS .Node.PCon("") – Percent consolidation

Method = HS .Node.Method("") – Chosen methodPMin = 1 – POwn – Minority share

PMinRev = POwn – 1 – Minority share reversed for offset entry



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Default Consolidation rule:

Once the data unit is opened a simple “If\Then” statement is created to skip any accounts

with a zero value. Open data unit will skip accounts with “NoData” automatically.

If Data = 0 Then

'skip record

Else

This rule replaces the default consolidation. It consolidates all accounts at the designated“[PCon]” or percent consolidation. The amount is pulled from the value member

“[Parent Total] ” and is posted to the value member “[Proportion]” .

Call HS.Con("",PCon,"")

The source for consolidation rules is the current account being processed for the current

point of view entity, scenario, year and period.

HS.Con (“Destination POV”, “Factor”, “Nature”)

Destination POV – Point of view where the consolidated data is written

Factor – Amount the consolidated amount is multiplied by, this can be a variable or anumber

Nature – This is used for audit trails. If a string is entered here the entry will be writtento the database under the Source and Destination transactions, which can be viewed in the

web interface. (Use this feature with caution because it can slow down consolidationtimes)

The following section will override the default consolidation for the designated accounts.



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Equity Method:

A Select Case statement is used to filter accounts based on the attribute in the

UserDefined 3 field.

Sets the Case to account attribute for User Defined 3

Select Case HS.Account.UD3(Account)

Select accounts with the attribute of “NETINC” in the User Defined 3 field (in thisexample it is account “RECUR” )

Case "NETINC"

If the method for the current entity is “EQUITY” then run the following rule.

If Method = "EQUITY" then

Call HS.Con("E#" & Holding & ".A#EQINCSUB.V#[Elimination]”,POwn,"EqPickUp")

Call HS.Con("E#" & Holding & ".A#INVESTINSUB.V#[Elimination]”,POwn*-1,"EqPickUp")

End If 'Method

The rule for the Equity method is designed to do the equity pickup for entity “OWN20”

and record the amount in the “[Elimination]” value of the Holding Company .

"E#" & Holding – Holding is a variable, established at the beginning of the Sub

Consolidate routine, that represents the Holding Company (as defined by FinancialManagement) of the current Parent of the current point of view Entity.

"A#EQINCSUB” – Represents the account “EQINSUB” where the elimination entry

will be posted.

"A#INVESTINSUB” – Represents the account “INVESTINSUB” where the

elimination entry will be posted.

“V#[Elimination]” – Represents the value member “[Elimination]” where the

elimination entry will be posted. The value member must be included since the defaultvalue member for HS.Con rules is the value member “[Proportion]”

POwn – Is a variable, established at the beginning of the Sub Consolidate routine thatrepresents the percent ownership of the current point of view entity.

POwn*-1 – Is the offset to POwn.

"EqPickUp" – Is the “Nature” for this rule. Once the consolidation has been run theentry created by this rule can be viewed in either Source or Destination Transactions via

the Financial Management web interface.



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Note: This rule is run while entity “OWN20” is the current point of view entity, however,the resulting entry is posted to entity “HOLDING” .

Subsidiary Method:

If the method for the current entity is “SUBSIDI ARY” then run the following rule.

If Method = "SUBSIDIARY" then

Call HS.Con("A#MI.V#[Elimination].I#[ICP None]”,PMin,"MinInt")

Call HS.Con("A#MIExp.V#[Elimination] .I#[ICP None]”,-PMin,"MinInt")

End If 'Method

The rule for the Subsidiary method is designed to record Minority Interest for entity“OWN80” and record the amount in the “[Elimination]” value.

A#MI – Represents the balance sheet account for Minority Interest

A#MIExp – Represents the income statement account for Minority Interest expense

V#[Elimination] – Represents the value member “[Elimination]” where the elimination

entry will be posted. The value member must be included since the default value memberfor HS.Con rules is the value member “[Proportion]”

PMin – Is a variable established at the beginning of the Sub Consolidate routine definedas ( 1 – PCon). This is the minority percent

"MinInt" - Is the “Nature” for this rule. Once the consolidation has been run the entrycreated by this rule can be viewed in either Source or Destination Transactions via the

Financial Management web interface.

Select accounts with the attribute of “EQUI TY” in the “User Defined 3” field (in thisexample it is accounts “COMSTOCK” and “PIC” )

Case "EQUITY"

If the method for the current entity is “Subsidiary” then run the following rule.

If Method = “SUBSIDIARY” then

The account is not included in the first line because the rule is reversing the current accountCall HS.Con("V#[Elimination].I#[ICP NONE]”,-PCon,"Equity")

Call HS.Con("A#ELIMOFFSET.V#[Elimination]”,PCon,"Equity")

End If 'Method



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The rule for the Subsidiary method is designed to reverse the amounts in accounts“COMSTOCK” and “PIC” for entity “OWN80” and record the offset in the

“[Elimination]” value member.

V#[Elimination] – It is necessary to include the value “[Elimination]” since the defaultvalue member for consolidation is “[Proportion]”

PCon - Percent consolidation

A#ELIMOFFSET – It is necessary to record an offsetting amount to balance the entrywithin the current entity. The account “ELIMOFFSET” will zero out at the

consolidated parent level.

"Equity" – Is the “Nature” for this rule. Once the consolidation has been run the entrycreated by this rule can be viewed in either Source or Destination Transactions via the


Holding Method:

If the method for the current entity is “Holding” then run the following rule.

If Method = “HOLDING” then

The account is not included in the first line because the rule is reversing the current accountCall HS.Con("V#[Elimination].I#[ICP NONE]”,-PCon,"Invest")

Call HS.Con("A#ELIMOFFSET.V#[Elimination]”,PCon,"Invest")

End If 'Method

The rule for the Holding method is designed to reverse the amounts in account“INVESTINSUB” for entity “HOLDING” and record the offset in the “[Elimination]”

value member.

V#[Elimination] – It is necessary to include the value “[Elimination]” since the default

value member for consolidation is “[Proportion]”

PCon - Percent consolidation

A#ELIMOFFSET – It is necessary to record an offsetting amount to balance the entrywithin the current entity. The account “ELIMOFFSET” will zero out at the

consolidated parent level.

"Invest" – Is the “Nature” for this rule. Once the consolidation has been run the entrycreated by this rule can be viewed in either Source or Destination Transactions via the




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Default Elimination rule:

This rule replaces the default elimination. It creates an elimination entry for any accountflagged as “IsICP” that has a “PlugAcct” with a value in a valid “ICP” member which is

a partner of the current point of view Entity under a common parent. (For more detail see

the Intercompany Elimination white paper)

CanEliminate = True – CanEliminate is a variable, this statement sets it to True or Yes

The following If statement is set to eliminate any condition that will make CanEliminate

False or No.

If (HS.Account.IsICP(Account) = FALSE) Then – Determines whether an account isflagged “IsICP”, if False continue

ElseIf (StrComp(ICP, “[ICP None]”, vbTextCompare) = 0) Then – Determines if thevalue being processed is in the ICP member [ICP None], if False continue

ElseIf (HS.Entity.IsDescendant(Parent,ICP) = False) Then – Determines if the ICPmember is a descendant of the current Parent being processed, if False continue

If (Plug = "") Then – Determine if the current account is missing the PlugAcct or has a blank in the PlugAcct field, if False continue

“StdElim” – Is the “Nature” for this rule. Once the consolidation has been run the entry

created by this rule can be viewed in either Source or Destination Transactions via the




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OWN20 Equity Pickup:

By right clicking the cell for account “RECUR” and value “[Parent Total] ” in entity

“OWN20” you can see the “Destination Transactions” .

Notice the “Cur rent Entity” or point of view entity is “OWN20” the “Entity” to receivethe entry is “HOLDING” . The “Nature” is “EqPickUp” from the custom consolidation

rules.

Note: In “Destination Transaction” you will see both sides of the entry.



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In the entity “HOLDING” for account “INVESTINSUB” and value “[Elimination]” you can view the “Source Transactions” for Equity Pickup from entity “OWN20” .

Notice line two has a source Entity of “OWN20” . The source data amount of $20,000

multiplied by the factor “-.20” gives the resulting entry of $4,000.

Note: Since the source account “RECUR” is a liability and the destination account“INVESTINSUB” is an asset the sign is reversed automatically by the system.



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OWN80 Minority Interest:

By right clicking the cell for account “RECUR” and value “[Parent Total] ” in entity

“OWN80” you can see the “Destination Transactions” .

In this instance the “Cur rent Entity” or point of view entity and the “Entity” to receivethe entry are both “OWN80” . The “Nature” is “MinInt” from the custom consolidation

rules.

Note: In “Destination Transaction” you will see both sides of the entry.



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You can view the “Source Transactions” for entity “OWN80” in account “MI” andvalue “[Elimination]” .

The source data amount of $100,000 multiplied by the factor “.20” (minority share) givesthe resulting entry of $20,000. The “Nature” is “MinInt” from the custom consolidation

rules.



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Equity and Investment Elimination:

The Equity in Entity “OWN80” , accounts “COMSTOCK” and “PIC” , are eliminated

against the Investment in Subsidiary in Entity “HOLDING” , account “INVESTINSUB” .

“OWN80”

“Source Transactions” for Entity “OWN80” for the following accounts:

“COMSTOCK”

“PIC”

“ELIMOFFSET”

Note: The entry to account “ELIMOFFSET” is to balance (as in a balanced journal

entry) the value member “[Elimination]” in Entity “OWN80” this will be offset by theinvestment elimination entry made in Entity “HOLDING” .



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“HOLDING”

“Source Transactions” for Entity “HOLDING” for the following accounts:

“INVESTINSUB”

“ELIMOFFSET”

Note: The entry to account “ELIMOFFSET” is to balance the value member“[Elimination]” in Entity “HOLDING” this will be offset by the entry made in Entity

“OWN80” at the parent level.



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Partial Consolidating Balance Sheet in Web Forms to show consolidating entities before,eliminations and after elimination entries have been posted

Before El iminations:

Eliminations:

After Eliminations:



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Consolidating Balance Sheet:



Check list for Building a Statutory consolidation application:

?

Make sure “ConsolidationRules” are flagged with “Y” in the Application

“AppSettings” ? Create and define your Consolidation Methods in metadata manager under

“ConsolMethods”

? Make sure the accounts you want to include in the custom consolidation ruleshave an appropriate “User Defined” attribute

? Create the Sub Consolidate routine in your rules file

? Create the default consolidation rule

? Create the default elimination rule

? Check drop down menu in “Ownership M anagement” page or the system

generated member list for Custom 1 “[ConsolMethods]” to make sure all of your

methods are there

?

Create grid to enter the shares information (Indirect Method) or go to the“Ownership Management” page to enter percent ownership and percent

consolidation (Direct Method)? If you chose the Indirect Method, go to “Ownership M anagement” page and run

calculations

? If you chose the Direct Method also enter the Consolidation method from the drop

down menu for each entity ? Once you run consolidations create a grid to check the “Nature” for “Source

Transactions” or ”Destination Transactions”

? Check all entities in value “[Elimination]” to make sure they are in balance

Statutory Consolidations in HFM

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