We often team with manufacturers working in a multi-national environment with multiple legal entities that are based on differing accounting standards, tax laws, currencies, and languages. This environment presents a challenge to the corporate accounting team when trying to develop consolidated financial statements.
There’s often a “push and pull” between the enterprise’s accounting and operations areas. While the accounting team has a need to segment and combine financial results, the operations team has the need to drive the global organization as a unified supply chain.
Global ERP Options
The Tier I ERP vendors such as SAP, Oracle, Infor Baan, as well as many best of breed Financial Consolidation Systems such as Oracle’s Hyperion Financial Management or IBM’s Cognos, provide a set of tools to enable an integrated and streamlined process.
The tools define a hierarchy of relationships with subsidiary financial results feeding parent companies. Each one of the systems offer feature sets that automate these functions. Workflow supports a series of sub ledger accounting closes that then feed the next level up in the hierarchy to the general ledger.
The Challenge of Localization
The specific local management, legal, and tax reporting requirements vary from country to country. For example in China there is a national VAT (value added tax) with different rates for products verses services. Separate VAT invoices have to be generated. Rules around asset valuation, depreciation, and required financial ratios differ. These differences drive variations in the local general ledger structure, financial statement formats, etc. The base denomination for the sub ledger may be in the local currency.
The localization differences create a challenge in how to account for transfer of goods, services, and assets between the subsidiaries, as well as how to display ERP reports. The systems facilitate a transfer price and transact in the base currency for the system. Upon receipt a currency variance is booked.
The accounting calendars of the subsidiaries may not line up with the parent calendars. This presents challenges with timing and cutoffs. To compensate the systems can provide multiple finance books for the same subsidiary. One set of books are maintained for local requirements and the other for global reporting requirements.
When considering the global tracking of operations, note that the general ledger structure and chart of accounts may differ between the subsidiary and the parent. The consolidation tools map subsidiary accounts to parent accounts. There may be one to many or many to one relationships between accounts. The consolidation tools enable transformation scripts and data mapping to accommodate.
The subsidiaries assets may be valued in local currency while the parent is in a different currency. The ERP and EPM (enterprise performance management) tools track the month to month currency valuations and conversions and account for the variations in the parent general ledger.
Auditing and compliance requirements require traceability of the financial transactions. The systems enable drill down from the parent General Ledger to the sub ledger to the source transaction. Note that each ERP system offers various levels of business intelligence reporting of consolidated operations.
Workflow and task management facilitate the close process, ensuring that all pieces to the financial puzzle are properly included each period. Variances to the financial process can be captured and trigger internal compliance alerts.
We’ve just presented a few of the complicated process issues facing manufacturers operating in a multi-national environment with multiple legal entities.
These issues, and many others related to global ERP implementation, all deserve consideration during the ERP selection process.
By implementing a global ERP solution or EPM solution, multi-national companies can drive to faster and more accurate financial reporting.
Our team of independent ERP consultants has specific experience helping companies navigate through this complex environment. Contact Ultra for more information.