Ledgers, Legal Entities, Balancing Segments, and Business Units

The process of designing an enterprise structure, including the accounting configuration, is the starting point for an implementation.

This process often includes determining financial, legal, and management reporting requirements, setting up primary and secondary ledgers, making currency choices, and examining consolidation considerations.

Primary ledgers are connected to reporting currencies and secondary ledgers to provide complete reporting options. You map the chart of accounts for the primary ledger to the chart of accounts for the secondary ledger. Legal entities are assigned to ledgers, both primary and secondary, and balancing segments are assigned to legal entities. Business units must be connected to both a primary ledger and a default legal entity. Business units can record transactions across legal entities.

The following figure provides an example of an enterprise structure with primary ledgers, secondary ledgers, a reporting currency, legal entities, business units, and balancing segments, and shows their relationships to one another.

Primary Ledgers

A primary ledger is the main record-keeping ledger. Create a primary ledger by combining a chart of accounts, accounting calendar, ledger currency, and accounting method. To determine the number of primary ledgers, your enterprise structure analysis must begin with determining financial, legal, and management reporting requirements. For example, if your company has separate subsidiaries in several countries worldwide, create multiple primary ledgers representing each country with the local currency, chart of accounts, calendar, and accounting method to enable reporting to each country's legal authorities.

If your company just has sales in different countries, with all results being managed by the corporate headquarters, create one primary ledger with multiple balancing segment values to represent each legal entity. Use secondary ledgers or reporting currencies to meet your local reporting requirements, as needed. Limiting the number of primary ledgers simplifies reporting because consolidation isn't required. Other consideration such as corporate year end, ownership considerations, and local government regulations, also affect the number of primary ledgers required.

Secondary Ledgers

A secondary ledger is an optional ledger linked to a primary ledger. A secondary ledger can differ from its related primary ledger in chart of accounts, accounting calendar, currency, accounting method, or ledger processing options. Reporting requirements, for example, that require a different accounting representation to comply with international or country-specific regulations, create the need for a secondary ledger.

If the primary and secondary ledgers use different:

• Charts of accounts, a chart of accounts mapping is required to instruct the application on how to propagate journals from the source chart of accounts to the target chart of accounts.

• Accounting calendars, the accounting date, and the general ledger date mapping table are used to determine the corresponding nonadjusting period in the secondary ledger. The date mapping table also provides the correlation between dates and nonadjusting periods for each accounting calendar.

• Ledger currencies, currency conversion rules are required to instruct the application on how to convert the transactions, journals, or balances from the source representation to the secondary ledger.

Note:

Journal conversion rules, based on the journal source and category, are required to provide instructions on how to propagate journals and types of journals from the source ledger to the secondary ledger.

Reporting Currencies

Reporting currencies are the currency you use for financial, legal, and management reporting. If your reporting currency isn't the same as your ledger currency, you can use the foreign currency translation process or reporting currencies functionality to convert your ledger account balances in your reporting currency. Currency conversion rules are required to instruct the application on how to convert the transactions, journals, or balances from the source representation to the reporting currency.

Legal Entities

Legal entities are discrete business units characterized by the legal environment in which they operate. The legal environment dictates how the legal entity should perform its financial, legal, and management reporting. Legal entities generally have the right to own property and the obligation to comply with labor laws for their country. They also have the responsibility to account for themselves and present financial statements and reports to company regulators, taxation authorities, and other stakeholders according to rules specified in the relevant legislation and applicable accounting standards. During setup, legal entities are assigned to the accounting configuration, which includes all ledgers, primary and secondary.

Balancing Segments

You assign primary balancing segment values to all legal entities before assigning values to the ledger. Then, assign specific primary balancing segment values to the primary and secondary ledgers to represent nonlegal entity related transactions such as adjustments. You can assign any primary balancing segment value that hasn't already been assigned to a legal entity. You are allowed to assign the same primary balancing segment values to more than one ledger. The assignment of primary balancing segment values to legal entities and ledgers is performed within the context of a single accounting setup. The Balancing Segment Value Assignments report is available to show all primary balancing segment values assigned to legal entities and ledgers across accounting setups to ensure the completeness and accuracy of their assignments. This report lets you quickly identify these errors and view any unassigned values.

Business Units

A business unit is a unit of an enterprise that performs one or many business functions that can be rolled up in a management hierarchy. When a business function produces financial transactions, a business unit must be assigned a primary ledger, and a default legal entity. Each business unit can post transactions to a single primary ledger, but it can process transactions for many legal entities. Normally, it has a manager, strategic objectives, a level of autonomy, and responsibility for its profit and loss. You define business units as separate task generally done after the accounting setups steps.

The business unit model:

• Allows for flexible implementation

• Provides a consistent entity for controlling and reporting on transactions

• Enables sharing of sets of reference data across applications

For example, if your company requires business unit managers to be responsible for managing all aspects of their part of the business, then consider using two balancing segments, company and business unit to enable the production of business unit level balance sheets and income statements.

Transactions are exclusive to business units. In other words, you can use business unit as a securing mechanism for transactions. For example, if you have an export business that you run differently from your domestic business, use business units to secure members of the export business from seeing the transactions of the domestic business.