SAPexperts - How To Use Transfer Prices For Intercompany Inventory Transfers With Standard Functionality

1/7/2016 SAPexperts | How to Use Transfer Prices for Intercompany Inventory Transfers with Standard Functionality
How to Use Transfer Prices for Intercompany

Inventory Transfers with Standard Functionality
by Surajit Mohanty, Independent Consultant
August 25, 2015
Learn how to design a standard SAP solution to meet the business requirement to implement transfer
prices or arm’slength prices between intercompany, parent, or subsidiary inventory transfers. The
main business reason for using transfer prices is to ensure that an organization having multiple
affiliate companies is not manipulating income taxes by setting up prices over or under the
comparative market prices while transferring goods or services.
Key Concept
The parallel valuation function that is implemented using controlling (CO) functionality and particularly
the material ledger enables general ledger (G/L) postings to carry multiple valuation data in various
currencies in the same accounting document. This process is fully compatible with the SAP General
Ledger and helps to post different valuation data in three local currency fields for any accounting
document.
When a transfer price is used to value inventory (materials), it carries a profit or markup in addition to the
base manufacturing cost. Many times this transfer pricing requirement is also known as profit in inventory.
The parallel valuation solution offered by the SAP material ledger helps to meet the business requirement
around transfer prices.
Using this standard solution, multinational companies can comply with various local US Generally Accepted
Accounting Practices (GAAP) rules set up by the Financial Accounting Standards Board (FASB) and governed
by the U.S. Securities and Exchange Commission (SEC) in the US, income tax rules set up by the IRS in the
US, or transfer pricing rules set up by the Organization for Economic Co-operation and Development (OECD) in
the EU. They can address the statutory need for preparing consolidated financial statements.
I describe the end-to-end process of using transfer prices for inventory transfers. This is a high-level currency
remeasurement process used to valuate foreign currency balance sheet item balances in a financial
statement of a company when this currency differs from company code currency. I also explain translation
strategy and eventual elimination entries leading up to preparation of a consolidated financial statement.
This solution uses three valuation views in SAP ERP Central Component (ECC) to capture the transfer pricing
postings. This solution can integrate with any final consolidation system (such as SAP Business Planning and
Consolidation [SAP BPC] or Hyperion) seamlessly. Usually organizations do not develop this type of system in
ECC and hence details are usually not available in the ECC system. An example of a system where this is
usually developed is SAP BPC. If you do not have any solution in ECC, usually transfer pricing audits can
become very cumbersome and can expose these organizations to potential fines.
Note
Arm’slength prices are prices used between two affiliated companies under the same group as if one
company is charging a nonrelated thirdparty company.
The first view is called legal valuation, which is stored in the local currency 1 field of any accounting
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The first view is called legal valuation, which is stored in the local currency 1 field of any accounting
document and carries a value that meets the requirement for the local GAAP tax ledger requirement. The
second valuation is called group valuation, which carries balances in the controlling area currency and a value
from the perspective of the entire group of companies. The third valuation is called profit center valuation,
which helps for management reporting or can also help in the preparation of consolidated financial
statements. I suggest that you use the profit center valuation view to prepare the consolidated financial
statements in this article. Therefore, the discussion of profit center valuation is limited to how it helps the
currency translation requirement from the FASB 52 (US GAAP) perspective only.
Note
The following are major prerequisites for this solution:
Material ledger parallel valuation function (The actual costing function can enhance the parallel
valuation process, but it’s not needed for my solution andhence is not discussed in this article).
Product costing configurations for materials to prepare three types of standard costs through
three different costing variants
Various currency settings at the company code and controlling area level
Pricing conditions records for transfer prices and profit center valuation views
Initial Design Decisions

There are certain decisions that become the foundation for the parallel valuation solution. The currency
valuation and currency keys are the first and foremost important topic over which the business has to agree.
Based on several implementation experiences for US-headquartered multinational organizations, I have seen
that three currency/valuation keys can suffice for the transfer price solution requirements. Table 1 lists these
three currency valuations that are used in my design.
Currency scenarios Definition Use
Intercompany profit is part of
Company currency or valuation
inventory valuation in the Statutory or tax reporting
with transfer price (10)
receiving company code.
Intercompany profit component is
Group currency or valuation not part of group valuation and Streamlines the elimination or
without transfer price (31) hence helps the consolidation consolidation process
purposes.
In case of intercompany
Profit center currency or valuation transfers, this view includes profit Helps in currency translation
with transfer price (32) and is in controlling area based on my solution
currency.
Table 1 Three currency and valuation setups
Note
Typically, if you have a scenario in which the same material is being supplied by several plants (same
or across different company codes), you would need to pick up a primary plant or company code. This
supplier or sourcing decision has to be established before implementing any SAP transfer pricing
solution. Therefore, once you have decided one primary source for a material in a plant, the SAP
system captures a variance during stock transfer postings from any other plant than the primary source
system captures a variance during stock transfer postings from any other plant than the primary source
plant. To illustrate this concept, consider a scenario in which you are receiving a material in plant A
from plant B for $125 (with $25 markup) and from plant C for $120 (having $20 markup). In this
scenario you would need to pick up which plant is primary and if you consider plant B as primary here,
the standard cost for legal valuation becomes $125 in plant A (the receiving plant).
The sidebar titled “Some Major Decisions” describes some key items that are required for this solution. You
need to activate the SAP material ledger module, but this module needs to be activated configuring the
setting for price determination as 2 (transaction-based price determination). This is a very lean
implementation of the material ledger module. The step-by-step detail setting for this has been covered by my
other article, “Streamline Cross-Company Postings Using SAP Parallel Valuation and Transfer Pricing in an LIV
Process (/Articles/2012/October/Streamline-Cross-Company-Postings-Using-SAP-Parallel-Valuation-and-
Transfer-Pricing-in-an-LIV-Process).”
Some Major Decisions
Before you start to implement my solution, you need to make the following key decisions:
It’s a best practice to use the same currency settings both in the company code (leading ledger)
and in the currency and valuation profile
Material ledger settings are done at a controlling area level and apply to all company codes
assigned to it
Use group currency/valuation without transfer price as one of the currency options
Use transaction code MM03 with a material number and plant to call up the screen shown in Figure 1. This
screen shows the accounting 1 view of a material master that carries three standard costs based on three
views or valuation approaches. The company code currency view is otherwise known as legal view, group
currency. Group valuation is alternatively known as group currency, group valuation. Group currency, profit
center valuation, is also known as profit center valuation.
Figure 1 Material master accounting 1 view with parallel valuation
Clarification for Profit Center Valuation

Consider a scenario in which a material X is transferred between two plants (plant 1 to plant 2). Plant 1 is
part of company code 1, and plant 2 is part of company code 2. If the original cost for plant 1 is $800, then
that becomes the group cost, and the plant 2 group cost is the same ($800). But let’s say plant 1 sells to
plant 2 with a markup of $200 and then the transfer price becomes $1,000. Therefore, this $1,000 becomes
the legal cost for plant 2 as shown in Figure 1. The profit center value can be entirely different: $900 ($800 +
$100 markup). This is the standard way of establishing the three views and standard costs.
For my solution, I suggest that you use the profit center view cost as $1,000. Therefore, if your company code
currency and group currency match as in the scenario that I just described, then according to my proposal,
the legal valuation and profit valuation become the same. Only in the case of intercompany scenarios does
profit center valuation use such a setup. In the case of intra-company transfers, such as between two profit
centers within one company code, any managerial transfer price can be used. The intra-company setup is not
shown in this article as it’s not part of the intercompany solution scope. From my experience, my solution is
fully compatible with any profit-specific transfer prices.
Major Configuration Steps

I now explain how to configure the following settings that are used for this solution:
Define a currency and valuation profile at the controlling area
Define a valuation clearing account for intercompany markup accounts
Define currency types at the company code level for the leading ledger
Set up currency types in the material ledger
Define costing variants for product costing
Define pricing procedures for sales
Define pricing procedures for sales
Define a Currency and Valuation Profile at the Controlling Area

To complete this step follow menu path, Controlling > General Controlling > Multiple Valuation
Approaches/Transfer Prices > Basic Settings > Maintain Currency and Valuation Profile. In the screen that
appears, define a currency and valuation (C&V) profile (Figure 2). In my example I have defined three
currencies or valuations by double-clicking the Details subfolder and entering the data shown under the Text
and Valuation View columns.
Figure 2 A currency and valuation profile
The currency and valuation profile is assigned to the controlling area. (This assignment is not shown in this
article to keep the scope limited.) For these detail configuration steps, follow my other article, “Streamline
Cross-Company Postings Using SAP Parallel Valuation and Transfer Pricing in an LIV Process
(/Articles/2012/October/Streamline-Cross-Company-Postings-Using-SAP-Parallel-Valuation-and-Transfer-
Pricing-in-an-LIV-Process).”
Define a Valuation Clearing Account for Intercompany Markup Accounts

To complete this step, follow menu path Controlling > General Controlling > Multiple Valuation
Approaches/Transfer Prices > Level of Detail > Define Valuation Clearing Account. The screen that appears
shows the settings to use subsequently to post the intercompany markup values into separate G/L accounts
during the intercompany accounting postings (Figure 3).
Figure 3 Intercompany balancing account setup
I use two different G/L accounts (500200 and 440010) in my business scenario example. However, you are
free to choose a single account. During the month-end closing process, these balances need to be cleared off
with each other. Therefore, I recommend that you use the same G/L account.
Define Currency Types at the Company Code Level for the Leading
Ledger
To define currency types at the company code level, follow menu path Financial Accounting (New) > Financial
Accounting Global Settings (New) > Ledger > Define Currency of Leading Ledger.
In the screen that appears (Figure 4), I activated three currency and valuation type combinations. For the first
local currency, I applied the company code currency with the legal valuation (valuation field shows 0). For the
second and third local currencies, I applied group currency with valuations of 1 and 2, respectively. A
valuation of 1 stands for group valuation. A valuation of 2 stands for profit center valuation.
Figure 4 Company code level currency settings
Set Up Currency Types in the Material Ledger

Follow menu path Controlling > Product Cost Controlling > Actual Costing/Material Ledger > Assign Currency
Types to Material Ledger Type. The screen that appears shows the settings of material ledger that help you to
synchronize the G/L and controlling area postings (Figure 5). This setting enables the material ledger to
transfer values for each material master (which has three standard costs) during accounting postings and
also to receive back the values for material ledger balances and inventory reporting.
Figure 5 Material ledger currency setup
For stock transfers, you need to activate the control type for FI (the check box under the CT from FI column in
Figure 5). For consumption to a cost center or a production order, you activate the control type for FI and the
Figure 5). For consumption to a cost center or a production order, you activate the control type for FI and the
control type for controlling (the check box under the CO Crcy Typ column).
Define Costing Variants for Product Costing

To complete this step, follow menu path Controlling > Product Cost Controlling > Material Cost Estimate with
Quantity Structure > Define Costing Variants (Costing Types within each variant) to configure the three costing
variants. Figure 6 is a key piece of my design. In this screen I show one costing variant (legal valuation) and
one costing type (01) within the variant (I have used the drilldown functionality to call up the screen shown in
Figure 6). You need to set up three costing variants with legal, group, and profit center valuations. In a
separate article, “Streamline Cross-Company Postings Using SAP Parallel Valuation and Transfer Pricing in an
LIV Process (/Articles/2012/October/Streamline-Cross-Company-Postings-Using-SAP-Parallel-Valuation-and-
Transfer-Pricing-in-an-LIV-Process)” I explain the configuration details for the three types of costing variants.
Figure 6 Costing type setup within a costing variant
Define Pricing Procedures for Sales

For this step, follow menu path Sales > Basic Functions > Pricing > Pricing Control > Define and Assign
Pricing Procedure. Drill down on the maintain pricing procedure configuration element to call up the screen
shown in Figure 7. The screen that appears shows the intercompany pricing procedure from the sales and
distribution (SD) side (Figure 7). Three condition types (KW00, PCVP, and PC00) are very important for my
solution. KW00 carries both the group valuation revenue and cost values during the intercompany billing (this
posts values only in the group valuation view that I discuss later). The PC00 condition carries the revenue for
profit center valuation, and PCVP carries the profit center cost for any material.
Figure 7 Sales and distribution pricing procedure setup
KW00 and PC00 are standard condition types available in the standard SAP system. To define the PCVP
condition type, copy the existing KW00 condition type and change the Cond. Category field from b to c where
the b stands for group valuation and c stands for profit center valuation. The details step to configure this
condition type has not been shown in this article as this a very common configuration step for the SD module
and the steps are readily available in the SAP Help portal.
The value for the condition type PC00 is in the controlling area currency and is the same as transfer prices.
To explain this condition record value, consider this example. Plant A (company code A) is selling to plant B
(company code B). The standard cost in plant A is $800, but there is a $200 markup between these plants.
Therefore, the legal transfer price is $1,000, and the PC00 condition record needs to be maintained as $1,000.
The condition record maintenance is a master data that is done using the transaction code VK11. The steps
are not covered in this article as this is a standard sales and distribution process.
Key Master Data Elements

The following master data records play an important role in my solution to store the transfer pricing
conditions and values and make them available across all logistics transactions:
Purchase information records
Profit center pricing tool
Sales pricing conditions
Purchase Information Records

To set up a purchase information record, use transaction code ME11. In the screen that appears (not shown)
enter a code for the intercompany vendor, material number, plant, and purchasing organization number. Press
Enter. In the next screen (also not shown) click the Conditions button. As you can see in the screen that
appears (Figure 8) the transfer price is determined based on a cost-plus method, and the markup percentage
is 30 percent on the source plant manufacturing costs.
Figure 8 Purchase information record setup for an intercompany vendor
Profit Center Pricing Tool

To set up profit center pricing, use transaction code 8KEZ. In the screen that appears (Figure 9) you manage
the profit pricing valuation, pricing procedure, and condition types. Figure 9 shows the profit center pricing
procedure ZTP001 that has been set up with two conditions (original cost plus markup percentage). In the left
section, you can create these condition types. In this screen you can manage all the condition creations and
then pricing procedure setup (ZTP001 in my case).
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Figure 9 The profit center transfer pricing cockpit
As shown in Figure 9, you can click the create or copy icon to either create a condition from scratch or use
an existing condition. For my current solution, I use the standard condition type TPB1 as is and create a
percent markup condition ZPT2. These two should suffice to set up a profit center valuation based on cost-
plus markup.
This screen deals with the configuration part only. However, to set up actual condition records for the percent
markup condition ZPT2, use transaction code VK19. This is a standard transaction code for condition record
maintenance and therefore I do not include the instruction for this setup. You can find the instructions in the
SAP Help portal for condition record maintenance. The condition type TPB1 is a standard condition, and no
record maintenance is necessary.
Based on my simple case, if plant A (company code A) has profit A and it is moving the material to plant B
(company code B) that has profit center B, you need to maintain the transfer price of $1,000 (based on the
continuing simple case discussion) for the material, receiving profit center B. Usually, if you have a lot of
materials that you deal with, you can use a common material that can be maintained in the material master of
the group of materials. For this article I assume that the prices have been set up using each individual
material level.
Sales Pricing Conditions

You need several standard SD condition records for a successful intercompany billing process. In addition to
all standard SD condition types that are needed for SD intercompany billing processing, the condition record
for condition type PC00 particularly needs to be maintained for my solution. The other two condition types,
KW00 and PCVP (Figure 7), are automatic condition types having no access sequence, and therefore get their
values without any condition records (these condition types basically carry standard costs) directly from the
accounting 1 view of material master for receiving plant. The SAP screen for maintaining condition record
PC00 using the transaction code VK11 is not shown in this article as it’s a common SD transaction and
instruction for setting this up is readily available in the SAP Help portal.
Process Flow for a Cross-Company Stock or Inventory

Transfer
Figure 10 shows an end-to-end business process flow for a cross-company stock transfer. Note that one
material is being transferred from plant U111 to U112, which belongs to two different company codes (i.e.,
legal entities). In this diagram all examples are demonstrated using US dollars. However, the proposed
solution also works in cases of multicurrency business transactions.
Figure An example business process for an intercompany stock transfer
10
In the example business process, you need to follow these steps:

Standard cost estimates in the sending and receiving plants
Goods issue against CCSTO (crosscompany stock transfer order) in the sending plant
Goods receipt against CCSTO in the receiving plant
Billing against CCSTO in the sending plant (intercompany accounts receivable)
Invoice against CCSTO in the receiving plant (intercompany accounts payable)
Standard Cost Estimates in the Sending and Receiving Plants

To configure settings for standard cost estimates in sending and receiving plants, use transaction code
MM03 with the material number and plant and press Enter. In the screen (not shown), select the accounting 1
view option from the pop-up box (not shown here) and press Enter again. The screen that appears shows the
accounting 1 view of the material number (Figure 11), and it displays various costs from three valuation view
perspectives.
Figure Material master standard costs in sending and receiving plants used in the
11 example
In Figure 11, I have shown two screens together to contrast the sending and receiving side cost estimates.
The top screen in Figure 11 is for the sending plant (U111) company code, and the bottom one is for the
receiving plant (U112) company code. The sending plant has all the currencies and valuation values in US
dollars with the same amount. This business case assumes that this material originates from the plant.
The same material is subsequently transferred to plant U112. Therefore, the material valuation of the
receiving plant U112 has $1,430 as the legal value ($1,100 plus a 30-percent markup equals $1,430). The
transfer price between these two plants or company codes is also $1,430. The group valuation at the U112
plant shows the same cost as the source plant (U111) (i.e., $1,100). My design for the profit center valuation
is to make it the same as legal valuation in US dollars (assuming this entire controlling area or parent
organization is based in the United States). Therefore, the profit center valuation view at the receiving plant
U112 is $1,430. Remember that three different costing variants help to create three types of standard costs
in both sending and receiving company codes (refer back to Figure 6).
Goods Issue against CCSTO in the Sending Plant

To display the accounting document for a goods issue posting, use transaction code FB03 or follow menu
path Accounting > Financial Accounting > General Ledger> Document> Display. In the screen that appears
(Figure 12), enter an accounting document number, company code, and fiscal year. Press Enter. Figure 12
shows the same accounting document with three different views or valuations. You can navigate through
these views by clicking the Display Currency button. The goods issue posting occurs at the sending plant, and
all the views or valuations have the same amounts being posted. These amounts in turn are equal to the
material cost of $1,100 (based on the values shown in Figure 11 for the sending plant). The accounting
posting has credited the inventory account and debited the stock-in-transit account.
posting has credited the inventory account and debited the stock-in-transit account.
Figure Goods issue document posted in the sending company code in three views
12
Goods Receipt Against CCSTO in the Receiving Plant

Use transaction code FB03 or follow menu path Accounting > Financial Accounting > General Ledger>
Document> Display with accounting document number, company code, and fiscal year as the parameters.
Press the Enter key to display the accounting document for a goods receipt posting as shown in Figure 13.
The goods receipt occurs in the receiving plant and in a separate company code in the example business
scenario.
Figure Goods receipt document in the receiving company code
13
Based on the business requirement mentioned earlier, the legal valuation shows the goods receipt value as
$1,430. This legal value is transferred from the standard cost field of the material master accounting 1 view
for the receiving plant as shown in Figure 11. The group valuation does not carry the markup, so it shows the
value as $1,100. The profit center value matches carry the same markup, and therefore, they have been
posted with $1,430. The group and profit center values are stored in a stock transfer purchase order that in
turn receives these values from the material master accounting 1 view.
Billing Against CCSTO in the Sending Plant (Intercompany Accounts

Receivable)
For this step, use transaction code FB03 or follow menu path Accounting > Financial Accounting > General
Ledger> Document> Display with accounting document number, company code, and fiscal year as the
parameters. Press Enter to display the accounting document for intercompany billing posting as shown in
Figure 14.
Figure Intercompany accounts receivable invoice in the sending company
14
The legal valuation view is chosen first for demonstration. This is posted in the sending company code. The
intercompany receivables and sales for legal valuation are based on the legal transfer price ($1,430). Also,
this accounting document shows that the intercompany cost of goods sold (COGS) has been posted by
debiting intercompany COGS (540000) and crediting the In-transit I/CO (Intercompany transit account
130070). This is based on the conditions in the sales and distribution (SD) pricing procedure.
I used a separate accrual condition to post the COGS at the time of billing. This is a very common process to
reconcile Profitability Analysis (CO-PA) and the G/L. The configuration detail behind this posting is not
discussed here as it pertains to the CO-PA module. Coming back to the valuation, I note that the COGS has
been posted with the source or sending plant standard cost that is $1,100 based on the values shown in
Figure 11.
To display the accounting postings for intercompany billing for group valuation, click the Display Currency
button in Figure 14 and select the group currency/group valuation radio button (not shown) to display the
accounting document as shown in Figure 15. The accounts receivable balances in all three views are the
same. Therefore, the first line does not show any difference from the value shown in Figure 14. However, the
values for intercompany sales and other accounts are based on the group cost for this material. Therefore,
$1,100 has been posted for intercompany sales, cost of goods accounts.
15
In this view an automatic intercompany markup is calculated and posted to the G/L account based on the
configurations shown in Figure 3. This is a feature of the parallel valuation solution from a standard SAP
system. The group valuation that represents the corporate /parent company view segregates the markup, and
it can be helpful in consolidation.
To display the accounting postings for intercompany billing for profit center valuation, click the Display
Currency button in Figure 15 and select the group currency/profit center valuation radio button (not shown) to
display the accounting lines for intercompany billing posting as shown in Figure 16. The accounts receivable
balances are again the same as the ones shown in Figure 15 as discussed in the earlier section.
16
The intercompany sales value is based on the sales condition record PC00, which, according to my example,
has the same value as the legal valuation. This is a coincidence as the legal valuation is also in US dollars,
which is the same as the controlling area (parent company) functional currency. However, the theory behind
this value is that it includes the markup and flows in from the sales condition type PC00.
Invoice Against CCSTO in Receiving Plant (Intercompany Accounts

Payable)
Payable)
Use transaction code FB03 or follow menu path Accounting > Financial Accounting > General Ledger>
Document> Display with accounting document number, company code, and fiscal year as the parameters.
Press Enter to display the accounting document for intercompany accounts payable invoice as shown in
Figure 17.
Figure The legal and group valuation views for the intercompany accounts payable
17 invoice in the receiving company
The legal and group valuation views are chosen together first for demonstration. Again, click the Display
Currency button and select the appropriate radio button (not shown) to toggle between the two parts of the
screen shown in Figure 17. The accounts payable amount that is the first line again contains the same values
in all valuation views. Therefore, this screen and the profit center view screen have the same amount for the
payables. The GR/IR (Goods Receipt or Invoice Receipt) account (in the Figure 17 the G/L account is 210020)
contains the transfer prices (including markup) for the legal valuation and group costs (without the markup
$1,100) for group valuation.
To display the invoice with profit center valuation from the Figure 17, click the Display Currency button, and
select the group currency/profit center valuation radio button (radio button options not shown here) to display
the accounting document line items for intercompany accounts payable invoice posting as shown in Figure
18. The accounts payable amount is the same as the legal and group valuation views. The GR/IR account
(210020) for profit center valuation carries the same amount as in the legal valuation view. Therefore, the
markup account amount is posted as zero.
Figure The profit center valuation view for the intercompany accounts payable invoice
18 in the receiving company
This step concludes the example business scenario. Each of the valuation views has been able to capture its
own values based on the transfer pricing rules and with a focus on final intercompany elimination. Now I
discuss how these values can be leveraged during month-end closing.
The Currency Translation Approach

As you can see from the examples that I described, parallel valuation has many advantages, but at the same
time it requires some unique approaches from the month-end closing aspect. In particular, I discuss two
important concepts here: foreign currency translation and ideal valuation view for consolidation. If you do not
activate parallel values, the legal valuation is the only choice. It is used for currency translation of foreign
company code financial statements at the end of each month to meet the FASB 52 regulation. It deals with
US GAAP rules regarding translation of foreign currency financial statements as well as for overall financial
consolidation.
With my solution, the legal valuation can still be used for translating the foreign currency balance sheet, but
the results are written to the group currency valuation view after taking into account the profit center
valuation view values. This is a standard process in the SAP G/L for foreign currency translation (transaction
code FAGL_FC_TRANS) that you can use. The details of the configuration for this transaction are not
discussed in this article to keep the scope limited to the parallel valuation solution only.
To summarize, you use the legal valuation with the desired exchange rate type, translate the values into group
currency, and take the difference between this translated value (which is in the controlling area
currency/group currency) and profit center valuation view values (which is also in group currency per my
solution). You would then need to use this differential value to update the group currency valuation views
values.
Therefore, after the currency translation transaction execution (and after the system finds the differential and
adds it up to the group currency values as I described), the resulting group valuation view value is fully
compliant with the US GAAP FASB52 requirement. At the same time it carries values that do not include the
intercompany markup. Therefore, intercompany inventory-related consolidation becomes easier. Two
requirements are solved: translating from the legal valuation view and not including the markup values.
requirements are solved: translating from the legal valuation view and not including the markup values.
Consolidation Approach
I present two options for consolidation before concluding this article. One is the traditional method, and the
second is an alternative option that is based on my solution approach. To give you a complete picture, I
extend my business case assuming that the receiving company code also has made an external customer
sale for part of the intercompany inventory.
To revisit my example here, two units of a particular material were sold from company code U015 (having a
standard cost of $1,100) to company U016 with a 30 percent markup (making the transfer price $1,430
excluding any additional charges). At the month end, one unit has been sold to an external customer for
$1,600. Usually, if you do not have the parallel valuation solution that I described, the legal valuation is used
for intercompany elimination and final consolidation.
Table 2 shows the conventional intercompany elimination using legal valuation, and includes several columns.
U015 is the source or sending company code. U016 is the receiving company code, assuming the functional
currency of this company code is in US dollars. The translated values (column U016 translated) are also the
same US dollars. The Elim journal column specifies the various elimination entries for various accounts that
need to be performed every quarter or month end to prepare consolidated financial statements.
U016 Elimination Consolidated

Account U015 U016
translated journal total
Sales revenue ($1,600) ($1,600) ($1,600)
Cost of sales
$1,430 $1,430 ($330) $1,100
(COS)
Intercompany
($2,860) $0 $2,860 $0
sales
Intercompany
$2,200 $0 ($2,200) $0
COS
Purchase price
variance (PPV)
$0 $0 $0
Foreign
exchange (FX)
Gross profit (no
further ($660) ($170) ($170) ($500)
distribution)
Table 2 Legal valuationbased major profit or loss accounts
I use major elimination entries to explain the concepts. First, the intercompany sales and intercompany COGS
account have been completely eliminated and the external cost of goods account has been brought down by
the markup amount for one unit of material that has been sold to an external customer. The remaining
inventory account (balance sheet) has been adjusted to take out the markup amount within it ($330). The last
column (Consolidated total) is a sum of the U015, U016 translated, and Elim columns with correct signs. The
gross profits in Table 2 for company codes U015 and U016 are shown to remind you that the corporate
income tax may need to be paid off by each company code separately.
Based on US GAAP or any other local GAAP, inventory balances in legal valuation (Table 3) needs to be
adjusted ($330 credit as explained above) for the intercompany materials that are still not sold to external
customers. Also, the taxable profit and income tax payable for this profit based on the intercompany sales in
customers. Also, the taxable profit and income tax payable for this profit based on the intercompany sales in
legal valuation requires additional deferral if the intercompany materials are not sold externally right away.
U016 Elimination Consolidated

Account U015 U016
translated journal total
Inventory 0 $1,430 $1,430 ($330) $1,100
Retained
($660) ($170) ($170) ($830)
earning
Table 3 Legal valuationbased major balance sheet accounts
The details of income tax deferral and the SAP technical corporate income tax process is not covered in this
article. Therefore, reviewing the elimination entries based on the legal valuation shown in Tables 2 and 3
(which may seem easy at first glance) pose many challenges as it’s very complex to keep track of the units of
materials purchased, sold to external customers, and still remaining under your inventory or units being used
in a further manufacturing process. If U016 company had used the material transferred from U015 in the
manufacturing process, it would have been more complex.
Switching gears, I now discuss the option of using the group valuation view for intercompany elimination
instead of legal valuation. Within the previous sections I have also described the currency translation
concepts for foreign currency financial statements using the group valuation and profit center valuation views
that make this alternative consolidation option fully viable. Table 4 describes this alternative consolidation
approach. Note that the same example has been reused here, and the columns headings have been kept
intact.
Group valuation — profit and loss
Account U015 U016 Elimination journal Consolidated total
Sales revenue ($1,600) ($1,600)
Cost of sales $1,100 $1,100
Intercompany sales ($2,200) ($2,200) $0
Intecompany cost of sales $2,200 ($2,200) $0

(COS)
Intercompany profit ($660) $660 $0
Gross profit $0 ($500) ($500)

Group valuation —
balance sheet
Account U015 U016 Elimination journal Consolidated total
Inventory 0 $1,100 $1,100
Retained earning $0 ($500) ($500)
Suggested method of consolidation using the group valuation
Table 4 Suggested method of consolidation using the group valuation
The most important observation for this alternative approach (Table 4) is the reduced number of elimination
entries. As the group valuation balances are always posted without the markup, they serve better for
consolidation/elimination entries. The complexity that I described during the legal valuation consolidation
approach (Tables 2 and 3) poses less of a challenge while using this valuation view. The primary reason is
that the group valuation values are always stripped off the markup, and therefore, multiple production levels,
inventory stages such as work in process, or final delivery and transfer across multiple company code have
no impact using this view.
Surajit Mohanty
Surajit Mohanty is an independent consultant with more than 14 years of SAP
Financials consulting experience. In the past he has worked with various consulting
firms such as IBM, Deloitte, and BearingPoint. He has vast experience in SAP CO
(Controlling/Management Accounting) and FI areas spanning across nine end-to-end
implementations. He has delivered solutions to a broad range of clients with various
roles in the areas of product costing, material ledger average costing, transfer pricing, profitability
analysis, revenue recognition, accounts receivable and payable, sales and use taxation, SAP General
Ledger, and integration of the SAP General Ledger with materials management, production execution, and
sales and distribution areas. He lives in Schaumburg, IL, with his wife and son.

See more by this author (/Financials/search?q=Surajit+Mohanty&exact=Checked)
You may contact the author at surajit.mohanty@hotmail.com (mailto:surajit.mohanty@hotmail.com?
cc=editor@financialsexpertonline.com).
If you have comments about this article or publication, or would like to submit an article idea, please
contact the editor (mailto:editor@financialsexpertonline.com).

SAPexperts - How To Use Transfer Prices For Intercompany Inventory Transfers With Standard Functionality

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How to Use Transfer Prices for Intercompany

Initial Design Decisions

Currency scenarios Definition Use

Clarification for Profit Center Valuation

Major Configuration Steps

Define a Currency and Valuation Profile at the Controlling Area

Define a Valuation Clearing Account for Intercompany Markup Accounts

Set Up Currency Types in the Material Ledger

Define Costing Variants for Product Costing

Define Pricing Procedures for Sales

Key Master Data Elements

Purchase Information Records

Profit Center Pricing Tool

Sales Pricing Conditions

Process Flow for a Cross-Company Stock or Inventory

In the example business process, you need to follow these steps:

Standard Cost Estimates in the Sending and Receiving Plants

Goods Issue against CCSTO in the Sending Plant

Goods Receipt Against CCSTO in the Receiving Plant

Billing Against CCSTO in the Sending Plant (Intercompany Accounts

Invoice Against CCSTO in Receiving Plant (Intercompany Accounts

The Currency Translation Approach

U016 Elimination Consolidated

Sales revenue ($1,600) ($1,600) ($1,600)

U016 Elimination Consolidated

Inventory 0 $1,430 $1,430 ($330) $1,100

Account U015 U016 Elimination journal Consolidated total

Sales revenue ($1,600) ($1,600)

Cost of sales $1,100 $1,100

Intercompany sales ($2,200) ($2,200) $0

Intecompany cost of sales $2,200 ($2,200) $0

Intercompany profit ($660) $660 $0

Gross profit $0 ($500) ($500)

Account U015 U016 Elimination journal Consolidated total

Inventory 0 $1,100 $1,100

Retained earning $0 ($500) ($500)

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