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    Mathieu Kamp
    How to limit the number of companies in the secondary ledgerAnswered
    Topic posted July 17, 2014 by Mathieu KampRed Ribbon: 250+ Points, last edited January 30, 2019, tagged Financials, General Ledger 
    310 Views, 10 Comments
    Title:
    How to limit the number of companies in the secondary ledger
    Summary:
    How to limit the number of companies in the secondary ledger in local currency when having 1 single USD primary ledger
    Content:

    At a client the proposed solution is to have 1 single USD primary ledger containing all companies (about 90) and having secondary ledgers around it. So for in for example the UK there is a secondary ledger in GBP, this secondary ledger should only contain the 'UK' companies (for example 2 companies).

     

    Does anyone know how to achieve this? Standard all 90 companies will be 'duplicated' in the secondary GBP ledger, idea is to limit this.

     

    Regards Mathieu

    Best Comment

    Seamus Moran

    Mathieu:

    Your client has a lot in common with many other multinationals.

    90 companies around the world is a reasonably small number: I'm familiar with customers/groups who have as many as 5000-10000 companies around the world, and some with as few as 15. 

    Your client is managed in home country currency.  That is also true for most groups.  In fact, it is often required as a matter of shareholder interest.  Both currency accounting standards, FAS 52 and IAS 21 address this: they define the currency you report to the stock market in as "reporting currency", and the currency in which you run your business as "functional currency", The currency in which the local nations require the bookkeeping in their ledgers is called "accounting currency".  The principles then explain how to convert from accounting currency to functional currency, so management can run the businesses, and to reporting currency so you can brief the owners on the results.

    If you imagine it in reverse you might see the difficulty in bookkeeping in corporate currency.  Say you were a Russian of a French company setting up in California, and you wanted to do your CA bookkeeping in RUB or EUR, do you think it would be easy or even acceptable?  Although you'd convert to USD for your tax return and sales tax return, when the state auditors came around, what do you think they'd say?  Are you aware of California law on sales taxes and income taxes in foreign currencies?

    You do a lot of inter-company trading between your companies.  Most companies also do this. In fact, almost all groups manufacture their products at companies that operate plants, inter-company them to companies where the products were designed, then again to a company that does localization on them, and finally to the company that sell them to the public.  There are schemes to manage this with names like buy/sell, commissionaire, commission agent and swiss-co.  Currency is carefully managed to avoid exposure, ensure balancing and elimination, and address risk.  One common trick is to denominate inter-company in the currency of either the buyer, the seller, or in the functional currency.

    You manage your company at management entity rather than legal entity.  This is also true in most groups. Legal Entity management are responsible for two things, legal compliance in the host country, and to ensure that employees carry out the business mangers instructions.  They do the first directly - a management instruction that breaks local law id void.  In that sense, your companies manage you: the local LE is the official employer and director of the local staff.  They do the second indirectly - the board of directors at the local companies are elected by the shareholders, who are one or more of the holding companies controlled by the public company. The board appoints managers and endorses messages to those managers from the business entity managers; those messages are the charters for employees to execute the intentions of the business managers.  (This can be quite theoretical at times, but again, it is worth looking at the California tax laws to understand it. the UK sued California for taxing UK entieties differently based on bookeeping practices, arguing that only the US had that right.  I forget who won: Thatcher or Wilson))

    You require balance sheets and income statement from entities other than legal entities.  Again, not really so unusual,  just about everyone does.  All of the ledger systems published by Oracle allow you to develop balance sheets and income statements and to convert them to functional and reporting currencies. In EBS & Fusion the feature is is called "balancing segment".  There are a lot of features around them: trees, so you can roll them up from local children into worldwide businesses, and even, into different sets of worldwide businesses.  They cross foot into their hosting LEs.  The get ETL'd into EPM systems.

    It is pretty typical that senior management is responsible for cross LE businesses.  LEs have officers and general managers: before the citizens of a country let you set up an LE, the insist on having the name of someone they can sue & arrest if you break the law.  And actually, your LEs have a bigger responsibility than just tax/liability/contracting reasons: they also literally own you assets in country, and therefore that contracting reason is that they are actually the seller of what you sell and buyer of what you buy, employer of whom you employ, et cetera.  They are your legally recognized entity in country.

    Almost everybody's management groups go across country, but they are hosted in-county by the LEs. So when you do inter-company, you move the asset (inventory, services) from one LE to another.  If you also move it from from one ME to another, you do that too.  Now, as smuggling is illegal, when you move things from country to country, you inter-company on invoices using SCM pricing, AR, AP, AGIS and Tax, and you update the MEs in whichever ledger you chose.  You n4eed to transfer profits, and eliminate them later - you need to pay taxes equitable in each country.  So, just "balancing" won't cut it.

    Business Units are not defined in a glossary, and in the Oracle environment they can have a range of meanings. One standard meaning is a cross-LE Management Entity, which is best represented by a hierarchy in FAH or HFM that rolls up BSVs from many ledgers after they've been translated to Functional currency or Reporting currency (if required.)  The BUs that hang off ledger are not that kind of BU. 

    Another meaning of BU is the management entity that manages the detail sub-ledger processing within a ledger.  We gave the name BU to the folk who manage the sub-ledgers that do accounting for a given ledger.  You need at least one of those for each country ledger, because they manage the compliance that happens in the sub-ledger.  If our Russian friend above had only one sub-ledger BU, she'd be filing California sales taxes not only in Rubles, but in the Russian format and according to Russian law, because the US sales tax code is limited by BU to the US, and the Canada code is limited by a Canadian BU to Canada, ET veteran.

    We have some enterprise structure white papers and other documentation that might be worth looking at. 

    • A ledger is a book that tracks an individual company's (LE) ownership of assets and responsibility for liabilities under local contract and company law.  While ledgers are great reporting tools, their primary function is to be "the books and records" required by company law.
    • Legal Entities are required to maintain a ledger as a function of their permission to exist.
    • Legal entities have property rights.  Management entities do not: they are not legally recognized. So legal entities own the assets and liabilities, and are authorized to buy and sell them, including product, and to hire servants and employees.
    • As such, it is maintained in a currency permitted by local company and contract law.
    • Ledgers governed by the same contract and company law can generally be combined into a county ledger.  Our software provides electronic ledger designed to meet this definition.
    • The accounting currency of ledger, subject to legal facilitation, is most efficient when it is the currency of the majority of transactions to be recorded in the ledger.
    • EBS, Fusion, Peoplsoft and JD Edwards and many other software ledgers, follow a an accounting convention where the books and records are split in a ledger and its sub-ledger(s).  Sub-ledgers aggregate detail transaction and summarize them in their specific ledgers. In Fusion and EBS, we call our sub-ledgers BUs, as they are managed by the middle-managers under LE direction who execute the instructions of the ME managers. BUs manage transaction level compliance in accordance with the laws the LE is required to follow, and can account for them both under local and corporate regimes.

    Again, hope that helps.

     

     

     

     

     

     

    Comment

     

    • Neil Ramsay

      There is no out of the box feature to do this.

      In theory, it would be possible to assign 90 secondary ledgers to a single primary and use SLA rules to filter the journals posted to each of the secondaries but frankly, I'm not aware of anyone who has done this and there are likely to be all sorts of performance and other issues associated with 90 secondaries.

      The question in my mind is why you would want to do this. Is it that there are 90 different COA's for the secondaries? If not, then why simply use security (data access sets) to limit access to BSVs and / or report filters. It seems much simpler and more flexible.

       

      Many thanks

       

      Neil

      • Mathieu Kamp

        Hi Neil,

        Thanks for the quick reply. It seems the best solution is to have 1 primary USD ledger for all 90 companies. The 90 companies are mostly non US companies and will need in a lot of countries a local ledger in local currency. So though they have the same CoA, the base currency needs to be different.

         

        So it will be 1 primary ledger with USD as base currency with 90 companies and around 20 secondary ledger around it with  GBP, EUR etc.. as base currency.

         

        Ideally you would only like to have the relevant companies in the applicable secondary ledger and not all...

         

        How would you be able to filter this with SLA rules?

         

        Regards Mathieu

    • Neil Ramsay

      Sorry for the confusion.

      Generally, our recomendation is to have a minimum of 1 primary (and, in this case, 1 secondary) ledger per country. This is not because of limitations associated with the software: there are a host of compliance and other reasons why it makes sense to have operations for no more than one country in a single ledger. When appropriate reporting and processing across ledgers can be acheived through ledger sets.

      If you plan to implement release 8, it may be necessary to implement a single ledger per legal entity for countries with strong document and accounting sequence requriements. This limitation is lifted in release 9.

    • Mathieu Kamp

      Hi Neil,

      Thanks again for the quick reply. What is the reasoning behind a ledger per country? It will also not tackle the issue of sequentially numbering documents as there are in most cases multiple companies per country. So for them having sequential numbering per legal entity would be the best option (which comes with R9 as far as I understood?)

      In this specific case this would mean quite a lot of ledgers and business units as well. There are a number of reasons why have multiple ledgers would make things more complicated in the case of this client and for them having 1 single USD primary ledger has really lots of significant benefits.

      Anyway we are a bit getting away from the question. Is there a way to restrict the companies being posted to a secondary ledger? Do you have a suggestion how to achieve this?

      Thanks in advance,

      best regards Mathieu

    • Neil Ramsay

      There is no way restrict the companies being posted to a secondary ledger.

      Please refer to my first response (There is no out of the box feature to do this...) for a possible suggestion and why it is unlikely to be viable.

      In short, please refer to my second response (Sorry for the confusion...) for our best practice recommendation.

      Many thanks

      Neil

       

       

    • Seamus Moran

      Mathieu:

       You ask: What is the reasoning behind a ledger per country?

      Company law, which grants permission for companies (LEs) to exist and own property, mandates that each company created keeps or maintains a ledger - a book - in which it journals (maintains a daily diary) its activity. The laws are thinking of handwritten ledgers, and we've automated these ledgers. The laws are written per country - each country has its own company law.  Usually, the laws don'r refer directly to software design, so you can use a single ledger "file" to contain the legal ledgers of several companies as long as they are governed by the same company law - so one ledger per country.  (Electronic ledger are getting into the law, as recent mandates in countries as different as Holland, Australia and Mexico illustrate.)

      That's the architecture we follow: individual company's ledger in a country in one country ledger. with consolidation (ledger sets, FAH, HFM) to form then into the group of companies under common control.   

      When you look at IFRS 10, IFRS 3, IAS 27, IAS 31 and IAS 32 (or US GAAP FAS 140, FAS 144, FIn 46, ARB 43, ARB 51 and APB 18) you see that they provide guidance on how to consolidate (aggregate, add together) the results of different LE's operations, rather than how to separate each out from a common ledger.

      When you consider that each LE is responsible to its local citizenry for its activities, (like not spoiling the environment. being fair to citizen/employees and customers) and for paying local income and corporation as well as customs, sales, and payroll taxes, you'll realize why local governments insist that their books of record are maintained in local compliance.   There is no legal basis, in US GAAP, IFRS, any national GAAP, or any law, for maintaining a corporate ledger and splitting it into local ones, although it is a holy grail of corporate managers and IT folk everywhere.

      We absolutely aim to do the next best thing.  Our customers have to comply with local law and corporate law both, at all times.  So we strive to enable that.  Traditionally, one did local first, in the primary ledger, and adjusted to corporate in secondary ledgers or on consolidation.  With the American's Sarbanes-Oxley and the EU's Eighth Directive and similar responses to business scandals around the would, many countries made corporate management take more responsibility for their operations around the world.  There was a huge shift to doing corporate first in the primary ledger, and local second in a secondary ledger: full compliance to both corporate standards and local standards by legal entity and by local management.

      However, depending on many factors, the match between a companies operations as seen by corporate and a countries regulations as experienced locally is sometimes easy and straightforward, and sometimes difficult and awkward.  So most companies on a worldwide basis will find many countries where they can go corporate first just like home; more countries where there are differences but they don't chafe too much, and some countries where it feels like an alien planet.

      The convergence of IFRS and US GAAP has been very helpful: I remember when bookkeeping unrealized FX gains and losses were illegal everywhere, but now that is accepted almost everywhere.

      There are also historical reasons why things are different.  The Rockefeller scandal in the 1890s caused the Americans to write Anti-trust laws (R. hid his acquisitions behind Trusts) that said when you control many LEs, you must account for them as if they were one.  Nobody else had that scandal, and nobody else passed that law, so nobody else requires it: and overseas companies operating in the US find it very strange.  I used to be the controller for a UK company in the US, and we had big difficulties with our UK management when we tried to file state tax returns across several LEs as mandated in the US now for over 100 years.  When I did VAT returns in France and the UK, it was mandated one return per LE, although I could get an exception to file on a group basis.

      So our software with ledger sets and FAH around electronic ledgers that themselves already combine several in-country legal ledgers, with pretty much a decent choice of whether local or corporate is primary, depending on what the locals permit, is a first rate delivery.

      I hope this indicates a little why it is one ledger per country.  The story of the tower of Babel tells the same thing from a different angle, I guess; and today's news, that the IASB and FASB are looking at going divergent ways on lease accounting, and the EU is going to study the effect of IFRS adoption, reinforces that.  Vive la difference.

      Thank you.

       

       

       

    • Neil Ramsay

      Mathieu,

      I can see the initial attraction of a single corporate ledger for the Euro area with individual secondaries for each country but, to be honest, it's difficult to identify clear functional advantages (over country level primaries) and I can't see how it could perform as well as having a separate primary ledger per country.

      I would like to emphasize the shared processing of ledger sets and reporting capabilities. Ledgers that share the same chart of accounts instance and calendar can share processing (for example, opening and closing of periods) and whose balances are stored in a single Essbase cube making it really easy to inquire and report as if they were a single entity.

      Or is your issue really with business units (raher than ledgers)?

      Neil

    • Mathieu Kamp

      Hi Neil and Seamus,

      Thanks for the extensive replies. I would like to give a bit more information on the specific case so you might understand a bit better why we are setting it up as described. It's not that we do not want to go for a ledger in local currency per country but we are afraid this will overcomplicate things as their corporate structure is already quite complicated.

      There are a couple of things why we think a single primary USD ledger still looks like a good option

      - this client has lots (around 90)  of companies/LE's in lots of countries (tax and liability reasons mainly). Bottom line the company is managed in USD and NOT in all the local currencies in the countries where they have companies.

      - Their is a lot of inter company recharging taking place from one company (for example in the UK) to other companies (in for example Singapore). When the primary book of the UK is in GBP and the primary book of Singapore is in SGD you will always have exchange gains and losses in your primary book while it is far more easy if both companies have USD as their base currency. Intercompany recharging is required in a number of ways (via automatic i/c balancing in GL, via I/C AR and AP invoices from one company to another for non project related recharging and via PPM for project related recharging)

      - Another point is that the corporation is not ran at company/LE level. Their is another dimension called 'Management Group' on which level the company is managed. A part of a company (for example company 101) can be managed by 'Management Group'  'A' and a part is management by Mgt Grp 'B'.  We actually require both a balance sheet and p&l at company/LE level and at Mgt Grp level (but as in the example Mgt Grp is not the sum of a number of companies, unfortunately). To achieve this we are testing the use of a secondary balancing segment (initial balancing segment is 'company/legal entity', secondary balancing segment is 'mgt grp'). A senior mgr is held responsible for a mgt grp and not for a company, the company is just their for tax/liability/contracting reasons.

      Company/LE can be related to a country (so to an individual ledger when using a ledger per country) but mgt grp goes across country. For the secondary balancing segment we will need automatic balancing but as far as I know this cannot be achieved 'over' multiple ledgers??

      - Business Unit is another thing. The 'out of the box' way is to setup a business unit per company/LE but that would lead to lots of business units while we actually only need 1 business unit. In each country the business processes are more or less the same and they are all using the same suppliers and customers (with some exceptions). So ideally 1 business unit. With 1 ledger per country you would at least have a business unit per country. (although we are facing an issue within PPM where PPM requires a business unit per company/LE because inter company billing out of PPM does not seem to work on LE level but only on Business Unit level).

      At the moment there has been a test system configured with 1 primary USD ledger and secondary ledgers around it for country specific statutory reporting with 1 business unit underneath. It is a test drive to 'check' whether that's the right way forward.

      Hopefully this clarifies the case a bit more,

      Best regards Mathieu

      • Seamus Moran

        Mathieu:

        Your client has a lot in common with many other multinationals.

        90 companies around the world is a reasonably small number: I'm familiar with customers/groups who have as many as 5000-10000 companies around the world, and some with as few as 15. 

        Your client is managed in home country currency.  That is also true for most groups.  In fact, it is often required as a matter of shareholder interest.  Both currency accounting standards, FAS 52 and IAS 21 address this: they define the currency you report to the stock market in as "reporting currency", and the currency in which you run your business as "functional currency", The currency in which the local nations require the bookkeeping in their ledgers is called "accounting currency".  The principles then explain how to convert from accounting currency to functional currency, so management can run the businesses, and to reporting currency so you can brief the owners on the results.

        If you imagine it in reverse you might see the difficulty in bookkeeping in corporate currency.  Say you were a Russian of a French company setting up in California, and you wanted to do your CA bookkeeping in RUB or EUR, do you think it would be easy or even acceptable?  Although you'd convert to USD for your tax return and sales tax return, when the state auditors came around, what do you think they'd say?  Are you aware of California law on sales taxes and income taxes in foreign currencies?

        You do a lot of inter-company trading between your companies.  Most companies also do this. In fact, almost all groups manufacture their products at companies that operate plants, inter-company them to companies where the products were designed, then again to a company that does localization on them, and finally to the company that sell them to the public.  There are schemes to manage this with names like buy/sell, commissionaire, commission agent and swiss-co.  Currency is carefully managed to avoid exposure, ensure balancing and elimination, and address risk.  One common trick is to denominate inter-company in the currency of either the buyer, the seller, or in the functional currency.

        You manage your company at management entity rather than legal entity.  This is also true in most groups. Legal Entity management are responsible for two things, legal compliance in the host country, and to ensure that employees carry out the business mangers instructions.  They do the first directly - a management instruction that breaks local law id void.  In that sense, your companies manage you: the local LE is the official employer and director of the local staff.  They do the second indirectly - the board of directors at the local companies are elected by the shareholders, who are one or more of the holding companies controlled by the public company. The board appoints managers and endorses messages to those managers from the business entity managers; those messages are the charters for employees to execute the intentions of the business managers.  (This can be quite theoretical at times, but again, it is worth looking at the California tax laws to understand it. the UK sued California for taxing UK entieties differently based on bookeeping practices, arguing that only the US had that right.  I forget who won: Thatcher or Wilson))

        You require balance sheets and income statement from entities other than legal entities.  Again, not really so unusual,  just about everyone does.  All of the ledger systems published by Oracle allow you to develop balance sheets and income statements and to convert them to functional and reporting currencies. In EBS & Fusion the feature is is called "balancing segment".  There are a lot of features around them: trees, so you can roll them up from local children into worldwide businesses, and even, into different sets of worldwide businesses.  They cross foot into their hosting LEs.  The get ETL'd into EPM systems.

        It is pretty typical that senior management is responsible for cross LE businesses.  LEs have officers and general managers: before the citizens of a country let you set up an LE, the insist on having the name of someone they can sue & arrest if you break the law.  And actually, your LEs have a bigger responsibility than just tax/liability/contracting reasons: they also literally own you assets in country, and therefore that contracting reason is that they are actually the seller of what you sell and buyer of what you buy, employer of whom you employ, et cetera.  They are your legally recognized entity in country.

        Almost everybody's management groups go across country, but they are hosted in-county by the LEs. So when you do inter-company, you move the asset (inventory, services) from one LE to another.  If you also move it from from one ME to another, you do that too.  Now, as smuggling is illegal, when you move things from country to country, you inter-company on invoices using SCM pricing, AR, AP, AGIS and Tax, and you update the MEs in whichever ledger you chose.  You n4eed to transfer profits, and eliminate them later - you need to pay taxes equitable in each country.  So, just "balancing" won't cut it.

        Business Units are not defined in a glossary, and in the Oracle environment they can have a range of meanings. One standard meaning is a cross-LE Management Entity, which is best represented by a hierarchy in FAH or HFM that rolls up BSVs from many ledgers after they've been translated to Functional currency or Reporting currency (if required.)  The BUs that hang off ledger are not that kind of BU. 

        Another meaning of BU is the management entity that manages the detail sub-ledger processing within a ledger.  We gave the name BU to the folk who manage the sub-ledgers that do accounting for a given ledger.  You need at least one of those for each country ledger, because they manage the compliance that happens in the sub-ledger.  If our Russian friend above had only one sub-ledger BU, she'd be filing California sales taxes not only in Rubles, but in the Russian format and according to Russian law, because the US sales tax code is limited by BU to the US, and the Canada code is limited by a Canadian BU to Canada, ET veteran.

        We have some enterprise structure white papers and other documentation that might be worth looking at. 

        • A ledger is a book that tracks an individual company's (LE) ownership of assets and responsibility for liabilities under local contract and company law.  While ledgers are great reporting tools, their primary function is to be "the books and records" required by company law.
        • Legal Entities are required to maintain a ledger as a function of their permission to exist.
        • Legal entities have property rights.  Management entities do not: they are not legally recognized. So legal entities own the assets and liabilities, and are authorized to buy and sell them, including product, and to hire servants and employees.
        • As such, it is maintained in a currency permitted by local company and contract law.
        • Ledgers governed by the same contract and company law can generally be combined into a county ledger.  Our software provides electronic ledger designed to meet this definition.
        • The accounting currency of ledger, subject to legal facilitation, is most efficient when it is the currency of the majority of transactions to be recorded in the ledger.
        • EBS, Fusion, Peoplsoft and JD Edwards and many other software ledgers, follow a an accounting convention where the books and records are split in a ledger and its sub-ledger(s).  Sub-ledgers aggregate detail transaction and summarize them in their specific ledgers. In Fusion and EBS, we call our sub-ledgers BUs, as they are managed by the middle-managers under LE direction who execute the instructions of the ME managers. BUs manage transaction level compliance in accordance with the laws the LE is required to follow, and can account for them both under local and corporate regimes.

        Again, hope that helps.

         

         

         

         

         

         

    • Mathieu Kamp

      Thanks for the information and replies,

      best regards Mathieu