Statutory Consolidations in HFM

Statutory Consolidations in System 9 Financial Management Created by: Danny Tijerina Advanced Technology Group

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Table of contents: Introduction:.....................................................................................................................3 Ownership:.......................................................................................................................5 Organizational hierarchy:.............................................................................................5 Entity Attributes:..........................................................................................................5 Direct method of entering ownership: .........................................................................6 Find System generated accounts:..................................................................................7 Indirect method of entering ownership:.......................................................................8 Calculate Ownership:...................................................................................................9 Direct v. Indirect Method:..............................................................................................10 Consolidation Methods:.................................................................................................10 Direct method of entering consolidation method: .....................................................12 Account Attributes:....................................................................................................13 Custom Consolidations:.................................................................................................14 Default Consolidation rule:........................................................................................15 Equity Method: ..........................................................................................................16 Subsidiary Method:....................................................................................................17 Holding Method:........................................................................................................18 Default Elimination rule: ...........................................................................................19 OWN20 Equity Pickup:.............................................................................................20 OWN80 Minority Interest:.........................................................................................22 Equity and Investment Elimination: ..........................................................................24 Consolidating Balance Sheet: ....................................................................................27 Check 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 Statutory Consolidations 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 ownership requiring the calculation of minority interest or partial ownership requiring equity accounting rules, is a growing requirement. The following will explain the metadata setup and business rules necessary to meet these requirements. A Subsidi ary 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. M in ority 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 another company. 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 percent minority interest on its balan ce sheet. The offset to the balance sh eet 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 Equity holding 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 to the Holding companies Balance Sheet in Other Investments. There is no P&L impact. Holding companies hold the Investments of other entities. The Holding Companies Equity LIVES and is not eliminated until its parents equity is eliminated. [PCON] is a system generated account to hold the percent for consolidation. The default is 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 minority interest (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 pickup OWNALL – Full consolidation with equity elimination

Entity Attributes: As described above,Management the Holdingprovides companyanholds an investment in Entities other companies. System 9 Financial attribute setting in the module to declare a holding company. This feature allows the user to take advantage of built in functionality for complex consolidations.

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

only have one designated Holding Company. 5

Direct method of entering ownership: When entering ownership information you can use the “ Ownershi p M anagement” page. The Parent Company is represented by the point of view Entity and the Subsidiaries are its 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 “Own ershi p M anagement ” page:

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Find System generated accounts:

Note: To find the System generated accounts, such as “[PCON]” or “[ Shar esOwned]” 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 Holding Company 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 indirect method 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 “[ I CP None]” . Shares owned by other entities are entered into the respective “ICP” member.

Once data is input into the and “[SharesOwned]”/”[VotingOwned]” accounts, The amounts for “[PCON]” , “[SharesOutstanding]”/”[VotingOutstanding]” “[POWN]” , “[PCTRL]” and the Consolidation “[Method]” can be calculated in the “Ownershi p M anagement ” page within “ Data Tas k” 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 “Cal culate Owne r shi p” button on the “Ownership Management” page within “ Data Tas ks” .

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 M ethod – Calculate the value of “1” for the account [Method] and appropriate Custom1 member for type of method Per cent Ownership – Calculate the value for account [POWN] Percent Consoli dation – Calculate the value for account [PCON] Di r ect Percent Own er shi p – Calculate value for account [DOWN] Entities – Selection of entity to be calculated

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Direct v. I nd irect Method

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When deciding whether to use the Direct Method or the Indirect Method for ownership the main considerations are as follows: o o o

How many entities are involved? Does the ownership change often? Are you calculating ownership manually in a spreadsheet?

If you only have a few entities involved for ownership purposes the Di rect M ethod is easy and straight forward. If you have a lot of entities involved for ownership purposes the I ndir ect M ethod might be more efficient for the following reasons: o o o o

Share information can be loaded through a data file Calculating ownership is more efficient than manual entry Calculating ownership is more consistent Manual entry lends itself to errors

Conso lidati on 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 ? 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 ConsolM ethods.

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Direct method of entering consolidation method: When entering consolidation methods you can use the “ Ownershi p M anagement” page. The Parent Company is represented by the point of view entity and the Subsidiaries are its 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 “Own er shi p M anagement” :

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Account Attributes: Custom consolidation rules are based on a combination of designated accounts and consolidation methods. Accounts are designated with a “U ser 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 “COM STOCK” and “PIC” have the same “UserDefined3” attribute because they are treated in the same way.

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Custom Consolidat

ions:

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 see whitepaper 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 parent Entity = HS. Entity. Member – Current point of view entity being processed PCon = HS.Node.PCon( "") – Percent consolidation Method = HS.Node. Method( "") – Chosen method PMin = 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 Tota l] ” 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 a number Nature – This is used for audittrails. If a string is entered here the entrywill be written

to 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 consolidation times) 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 this example 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 H olding Comp any . "E#" & Holding – Holding is a variable, established at the beginning of the Sub Consolidate routine, that represents the Holding Company (as defined by Financial Management) 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 elimination entry will be posted.

the

account

“INVESTINSUB”

where the

where the “V#[Elimination]” – Represents the value member “[Elimination]” elimination entry will be posted. The value member must be included since the default value member for HS.Con rules is the value member “[Proportion]” POwn – Is a variable, established at the beginning of the Sub Consolidate routine that represents 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 the entry created by this rule can be viewed in either Sour ce or D estin ation T ransactions 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 “SUBSI DI ARY” then run the following rule. If Method = "SUBSIDIARY" then Call HS. Con( "A# MI.V#[Elimination].I#[IC P None]”,PMin,"MinInt" ) Call HS. Con( "A# MIExp.V#[Elim ination] .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 member for HS.Con rules is the value member “[Proportion]” PMin – Is a variable established at the beginning of the Sub Consolidate routine defined as ( 1 – PCon). This is the minority percent "MinInt" - Is the “Nature” for this rule. Once the consolidation has been run the entry created by this rule can be viewed in either Sour ce or Destin ation Tr ansactions via the Financial Management web interface.

Select accounts with the attribute of “E QUI TY” in the “U ser Defi ned 3” field (in this example it is accounts “COM STOCK” 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 account Call 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]” value member for consolidation is “[Proportion]”

since the default

PCon - Percent consolidation A#ELIMOFFSET It is necessary to record“ELIMOFFSET” an offsetting amount within the current – entity. The account willto balance zero outtheatentry the consolidated parent level. "Equity" – Is the “Nature” for this rule. Once the consolidation has been run the entry created by this rule can be viewed in either Sour ce or Destin ation T ransactions via the Financial Management web interface.

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 account Call 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]” value member for consolidation is “[Proportion]”

since the default

PCon - Percent consolidation A#ELIMOFFSET – It is necessary to record an offsetting amount to balance the entry within 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 entry created by this rule can be viewed in either Sour ce or Destin ation T ransactions via the Financial Management web interface.

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Default Elimi nation rule:

This rule replaces the default elimination. It creates an elimination entry for any account flagged 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 is flagged “IsICP”, if False continue ElseIf (StrComp( ICP , “[ICP None]”, vbTextCompare) = 0) Then – Determines if the value being processed is in the ICP member [ICP None], if False continue ElseIf ( HS . Entity. IsDescendant(Parent, ICP ) = False) Then – Determines if the ICP member 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 byManagement this rule canweb be viewed in either Sour ce or Destin ation T ransactions via the Financial interface.

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OWN20 Equity Pickup: By right clicking the cell for account “RECUR” and value “[ Parent Tota l] ” in entity “OWN20” you can see the “D estin ation T ransactions” .

Notice the “Cur rent Entity ” or point of view entity is “OWN20” the “Entity” to receive the entry is “HOLDING” . The “Nature” is “EqPickUp” from the custom consolidation rules. Note: In “D estin ation Tran saction ” 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 “Sour ce Tr ansactions ” 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 Tota l] ” in entity “OWN80” you can see the “D estin ation T ransactions” .

In this instance the “Cur rent Entity ” or point of view entity and the “Entity” to receive the entry are both “OWN80” . The “Nature” is “MinInt” from the custom consolidation rules. Note: In “D estin ation Tran saction ” you will see both sides of the entry.

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You can view the “Sour ce Tr ansactions ” for entity “OWN80” in account “MI” and value “[Elimination]” .

The source data amount of $100,000 multiplied by the factor “.20” (minority share) gives the 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”

“Sour ce Tr ansactions ” 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 the investment elimination entry made in Entity “HOLDING” .

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“HOLDING”

“Sour ce Tr ansactions ” for Entity “HOLDING”

for the following accounts:

“INVESTINSUB”

“ELIMOFFSET”

is to balance the value member Note: The entry to account “ELIMOFFSET” “[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 imi nations :

Eliminations:

Afte r Eli minations :

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Consolidating Balance Sheet:

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Check list for Building a Statutory consolidation app lication: ? ? ?

? ? ? ?

?

? ? ? ?

Make sure “ConsolidationRules” are flagged with “Y” in the Application “AppSettings” Create and define your Consolidation Methods in metadata manager under “ConsolM ethods” Make sure the accounts you want to include in the custom consolidation rules have an appropriate “U ser Defin ed” 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 “Own er shi p 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 M anagement” page to enter percent ownership and percent consolidation (Direct Method) If you chose the Indirect Method, go to “Own ership 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 ” Destin ation T r ansactions ” Check all entities in value “[Elimination]” to make sure they are in balance

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