Currency translation, eliminations and reclassification

Once reported data is in and validated, the group figures still mix currencies and include everything the group did with itself. Currency translation fixes the first problem in the Data Monitor; eliminations and reclassifications fix the second in the Consolidation Monitor.

Currency translation

Alternadores reports in MXN; the group reports in USD. Translation follows a currency translation method that assigns an exchange rate to each kind of FS item: balance sheet items at the closing rate, income statement items at the average rate, equity at historical rates. Each FS item carries a currency translation attribute, and the method maps those attributes to exchange rate indicators and then to exchange rate types and rates. Because the balance sheet and income statement use different rates, the translated balance sheet would not balance. The difference is the currency translation adjustment (CTA), which the method posts to an equity FS item.

In the example, net assets of MXN 92.5 million translate to USD 5,000,000.00 at the closing rate, but equity and the year's income translated at their own rates add up to USD 5,269,357.08. The CTA of USD -269,357.08 closes the gap. The arithmetic is simple; the test is whether the right rate type was used for each FS item, whether historical rates were maintained for equity, and whether the CTA lands on the equity FS item finance expects.

Interunit eliminations

When 1710 sells alternators to 1810 at the internal price of USD 200.00 per piece, 1710 books revenue and a receivable; 1810 books inventory and a payable. For the group, none of that happened. The interunit elimination tasks in the Consolidation Monitor match pairs of FS items by unit and partner unit, and post two-sided eliminations on posting level 20: receivables against payables, revenue against cost of sales, other income against other expense. If the two sides do not agree, the difference is posted to an elimination difference FS item, which should be small and explained.

Group Reporting's eliminations work best when Intercompany Matching and Reconciliation (covered in sap-fin-304) has already matched the pairs in the general ledger before the close. A USD 34,000 shipment booked by 1710 and keyed as USD 17,000 by 1810 should be found in matching during the month, not as an elimination difference on day 5.

Reclassifications and unrealized profit

Reclassifications move amounts from one FS item to another based on rules: for example, moving an intercompany loan from current to non-current, or eliminating dividends against investment income. They are configured as reclassification methods and run as Consolidation Monitor tasks. One-off adjustments can also be posted manually as group journal entries, with a document type that sets the posting level.

Inventory that 1810 still holds at quarter-end carries 1710's margin. If 1810 has 1,200 units of CMC-ALT-100 on hand bought at USD 200.00 and 1710's cost is USD 150.00, the group carries USD 60,000.00 of unrealized profit in inventory. Elimination of intercompany profit in inventory needs inventory data by partner, which often comes from additional reported data; how it is automated depends on your release and configuration, so check the options before promising it.

What goes wrong in testing

A good test close uses small, known numbers. Post one intercompany sale of USD 34,000 from 1710 to 1810, translate a handful of 1910 balances at rates you choose, and calculate the expected elimination and CTA by hand before you run the monitors. When the system and the spreadsheet agree on small numbers, the full-volume close becomes a reconciliation exercise rather than an investigation.