Using Equitization
During the accounting year the equity of a subsidiary can change affecting the ownership value of a parent in that subsidiary. For example, net income or losses of a subsidiary increases or decreases the investment and owner equity of the parent. General Ledger enables you to set up multiple equitization rules for multiple business units that have complex parent-subsidiary relationships and create journal entries within a single process. A ledger for a parent entity can be different from that of its subsidiary and, as one of the options, you can generate elimination entries for consolidated reporting.
Note: Equitization supports only the Business Unit field as the processing entity. This is unlike the Consolidation process, which allows consolidation of fields other than business unit, such as the Operating Unit field.
This section discusses:
In this example, Company M0004 owns 70% of company M0002. In January of 2003, M0002 had a net income of 100 in period 1. An equitization rule is set up to select expense and revenue accounts as the equitization source, and investment and equity income as the target (debit and credit, respectively). The Equitization process creates journals to book 70 to the M0004 ledger investment account and −70 to its equity income account, as indicated by the entries in this table:
|
Equitization Source and Target Account Types |
M0002 |
M0004 |
|---|---|---|
|
NA |
Period 1 |
Period 1 |
|
Cash, Receivables, and so on |
100 |
230 |
|
Investment in M0002 |
NA |
70 a |
|
Revenues |
<1000> |
<2230> |
|
Expenses |
900 |
2000 |
|
Income before equity adjustment |
<100> |
<230> |
|
Equity income |
NA |
<70>a |
|
Net income |
<100> |
<300> |
Viewing an Example of Multiple Parent/Subsidiary Ownership
If, in addition to the M0002 to M0004 relationship, F0001 owns 20% of M0002 and 60% of M0004, the equity income from subsidiaries for F0001 is 200, with 20 from M0002 and 180 from M0004, as indicated by the b entries:
|
Equitization Source and Target Account Types |
M0002 |
M0004 |
F0001 |
|---|---|---|---|
|
NA |
Period 1 |
Period 1 |
Period 1 |
|
Cash, Receivables, and so on |
100 |
230 |
NA |
|
Investment in M0002 |
NA |
70 a |
20 b |
|
Investment in M0004 |
NA |
NA |
180 b |
|
Revenues |
<1000> |
<2230> |
<1500> |
|
Expenses |
900 |
2000 |
1000 |
|
Income before equity adjustment |
<100> |
<230> |
<500> |
|
Equity income |
NA |
<70> a |
<200> b |
|
Net income |
<100> |
<300> |
<700> |
The Equitization process determines the correct sequence to process. It equitizes from M0002 to M0004 and F0001 first, and then M0004 to F0001, so that the 70 from the first step is included as part of the net income in the second.
Creating Elimination and Minority Interest Entries
An option of the Equitization process enables you to generate elimination and minority interest entries as by-products. If specified, the Equitization process creates the elimination entries that reverse target amounts. As in the Consolidations process, these entries go to the proper elimination business units in the consolidation tree and are used in consolidated reporting. In the following example, elimination entries are generated for elimination business unit ME001:
|
Elimination Entries |
M0002 |
M0004 |
ME001 |
|---|---|---|---|
|
NA |
Period 1 |
Period 1 |
Period 1 |
|
Cash, Receivables, and so. |
100 |
230 |
NA |
|
Investment in M0002 |
NA |
70 a |
<70) c |
|
Minority interest liabilities |
NA |
NA |
<30> c |
|
Revenues |
<1000> |
<2230> |
NA |
|
Expenses |
900 |
2000 |
NA |
|
Income before equity adjustments |
<100> |
<230> |
NA |
|
Equity income |
NA |
<70> a |
70 c |
|
Minority interest expenses |
NA |
NA |
30 c |
|
Net income |
<100> |
<300> |
100 |
If year-to-date elimination for investment is handled in the Equitization process, the Consolidations process should not generate eliminations again.
Offsetting the Source
This option creates entries to offset the equitized source amount for subsidiary entities. It may be useful for special reporting purposes:
|
Equitized Source Offset Entries Account Types |
M0002 |
M0004 |
|---|---|---|
|
NA |
Period 1 |
Period 1 |
|
Cash, Receivables, and so on. |
100 |
230 |
|
Investment in M0002 |
NA |
70 a |
|
Revenues |
<1000> |
<2230> |
|
Expenses |
900 |
2000 |
|
Equity income |
NA |
<70> a |
|
Retained earnings offset |
100 d |
NA |
|
Equitized income summary |
<100> d |
NA |
The Equitization process includes the following components:
Field or Control |
Description |
|---|---|
Data |
Data used for calculation comes from ledgers for all the subsidiary business units involved. Different business units can use different ledgers so long as they are within the same physical ledger table (that is, share the same ledger template) and the same currency code. For example, M0004 uses ledger ACTUALS in the Equitization process, which specified the U.S. dollar as the transaction currency. M0002 uses its U.S. dollar ledger REPORTS in the process because its primary ledger ACTUALS uses the Canadian dollar as its base currency. On the Ledger Sets page, define which ledgers are used in the process within each business unit, keyed by consolidation trees. |
Scope |
Specify which business units to cover during Equitization by creating a business unit tree. You also define the ownership relationships on the Subsidiary Ownership page, specifying subsidiary entities and parent entities with their percentage of ownership. Any parent-subsidiary sets included in the business unit tree are included in the Equitization process. If you are also performing Consolidations, Equitization can share the consolidation tree with the Consolidation process, as well as the ownership sets, if applicable. |
Rules |
The Equitization Rules component allows you to specify the equitization Source, Target, Subsidiary Offset, and Minority Interest entries. You can then group multiple equitization rules together on the Equitization Group page. |
Process |
Specify run options for the Equitization background process on the Equitization Request page. General Ledger creates journal entries based on the equitization rules and scope, and you can edit these journals as part of Equitization. If you need to rerun the Equitization process , select theUndo Previous Process field on the Equitization Request page to reverse all previous processing. If the process fails, unlock all journals before rerunning unpost. |