Multiple Valuation Approaches – Profit Center Valuation

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Why are Different Valuation Approaches Needed?

It is a need for many organizations to report financial results based on different/multiple accounting regulations. To instance, European companies must report their consolidated financial results according to International Financial Reporting Standards (IFRS), while US companies must report according to US Generally Accepted Accounting Principles (US GAAP).

It is possible to have one legal reporting perspective while reporting individual company and business transactions of it since commercial and tax laws and regulations. In addition to this legal reporting perspective, companies need reporting perspectives from the point of view of whole group and also single non-legal entity like profit center.

It is common that some companies which are operating in multiple markets with large volume of intercompany and intracompany transactions need to have both legal and management reporting purposes while legal reporting does not include intercompany/intracompany profits, management reporting does. To find out intercompany/intracompany profits, transfer prices which is agreed transactional price between two related entities need to be determined. These entities normally different legal entities but it is possible to have this in SAP with different non-legal entities like profit centers.

What are the Business Problems without SAP Solution?

  • Offline processes which take long time and could be inaccurate.
    • Collecting source data from organizations.
    • Transforming, editing, calculating source data.
    • Reviewing calculated data.
  • Long forecast and plan period because of production plan dependencies between organization units.
  • Cannot foresee the profitability and tariff effect on production changes.
  • Limited central visibility.

What does SAP do for multiple valuation?

SAP has 3 different valuation approaches to value inventory:

Legal view

The view of individual legal entity shows the transfers of goods and services between independent companies according to legal reporting requirements.

Group view

The view of group of legal entities which shows results of exchanged goods and services by eliminating intercompany profits.

Profit center view

The view of non-legal entity (e.g., profit center) which show result of exchanged goods and services between profit centers by using transfer prices. So, difference from group view is showing intercompany/intracompany profits rather that eliminating them.

How does Profit Center Valuation Works?

To understand profit center valuation, it is possible to review example below:

  • For material A, cost is 2 EUR for 1 piece in plant X.
  • Transfer price of material A in plant X for plant Y is entered as 2,4 EUR.
  • When the material is transferred from X to Y plant for 10 pieces,
    • 24 EUR of revenue and 20 EUR of COGS will be postedin X plant.
    • In plant Y, Inventory account will be posted with 24 EUR and this will be the actual price for that moment.

Above posting described will be only displayed in profit center valuation of accounting document. It will have no effect in legal valuation.

  • Profit center valuation result for this movement will be like below:
    • Plant X will show 0 ending inventory with 24 EUR revenue and 20 EUR COGS.
    • Plant Y will have 24 EUR in inventory value.

Furthermore, let’s say plant Y adds 10 EUR cost to material A and now material A turns to material B and material B is sold with 10 pieces to customer with 40 EUR.

  • In that case, in legal view,
    • We will have 0 revenue and 0 COGS for plant X,
    • and for plant Y, we will have 40 EUR revenue and 30 EUR COGS with 10 EUR profit
  • In profit center view,
    • for plant X, we will have 24 EUR revenue, 20 EUR COGS,
    • and for plant Y, we will have 40 EUR revenue with 34 COGS.
  • As a result, in profit center view 10 EUR profit is split to plant X and plant Y in sequence with 4 and 6 EUR.

Reporting for Multiple Valuation

Reporting for multiple valuations can be done from material price analysis report, COPA reports and profit center reporting. In material price analysis and COPA reports, values can be displayed from both legal view and profit center view. In COPA, sales can be reported with profit center values. In material price analysis report, movement and costs can be reported from both cost views.

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