Defining Consolidation of Investments

Hi there! My name is Anthony. I work as an intermediate consolidation consultant in Group Reporting at ABC Corporation. I recently got the assignment to implement activity-based consolidation of investments in our new project. 

I'm familiar with: 

• SAP S/4HANA Finance 
• The corporate close process 
• The group reporting concepts 
• Configuring basic group reporting tasks 
• Basic concepts of consolidation of investments from a business point of view 

I need further information on different set-up possibilities for the activity-based consolidation of investments.    

Let's get started.

The Consolidation Process  

In the Consolidation process (balance sheet, profit and loss) financial items of several entities are combined into one group as if they were liquidated.  

The goal of the consolidation process is to produce consolidated financial statements. 

Entities usually report their financial data in local currency, without any consolidation group assignments. Currency conversion translates data from local currency to the group currency. 

Adjustments to trial balance data can be booked on various posting levels such as posting level 10 (representing standardized data). Eliminations are recorded on a different posting level, 20 (representing intercompany eliminations). Group adjustments and booking of the non-controlling interest are done in posting level 30 (representing group-dependent entries). 

The purpose of Consolidation of Investment (C/I) Solutions is to automate the accounting for the investment relationships. 

Consolidation of Investments deals with:  

• The elimination of the investment of investors and of equity of their subsidiaries (investee units). 
• The calculation of non-controlling interests (NCI) of the eliminated investment and equity and the differential amounts. 
• The reclassification of the minority portion of profit and loss (P&L) reported by the subsidiaries.  

The system performs these calculations and postings on the base of reported data for investment and equity and group-dependent investment share percentages. 

Let's cover some key terms when discussing the consolidation process with customers. 

Select the play button below to learn how to identify key terms for consolidation of investments.

This video covers key terms used when discussing consolidation of investment. See the following glossary of terms: 

• Parent (holding): The consolidating entity.  
• Purchase method: Generally used if ownership is greater than 50%. 
• Equity method: Generally used when ownership is less than 50% and higher than 20%. Investor: The buyer of a company. 
• Investee: The company being purchased.  
• Direct share: The percentage (%) ownership between the investor and the investee. 
• Group share: The total percentage (%) ownership between the higher level holding and the investee. This includes indirect ownership. Group share data can be entered manually or can be uploaded.  
• Non-controlling interest: The percentage (%) portion of the investee not owned by the group.  
• Goodwill: The difference between the purchase price and the fair market value of the investee's equity. 

Let's recap the elimination postings for the two consolidation methods, the purchase method and the equity method, in a business example. Next step would be to set up activity-based C/I with Group Reporting. 

The purchase method is generally used if the ownership percentage is greater than 50%. 

When consolidating using the purchase method, the individual financial statements of an investee unit are included in the consolidated financial statements. When a subsidiary is first acquired, the Purchase method eliminates the investment against the equity of the subsidiary. The difference goes to goodwill.  

In the corporate balance sheet, goodwill is reported as non-current assets in the assets. This is an intangible asset because it does not physically exist. Negative goodwill is a liability. Report negative goodwill separately - either in the balance sheet or the notes.  

We also record non-controlling interest. We use subsequent consolidation to calculate any non-controlling interest and other impacts resulting from a subsidiary's net income.  

After the subsidiary is first acquired, the parent and minority share of the subsidiary's earnings is determined. For example, if you own 80% of a subsidiary, you claim 80% of its annual net income, while the minority share is 20%. 

Let's look at elimination postings for the purchase method in a business example ABC Corporation provided to Anthony.  

The above table displays the elimination postings for the first and subsequent consolidation in December 2025 for a consolidation group. Belgium is the investor with an ownership of 80% in France who is the investee. Since the ownership of Belgium is higher than 50%, use the Purchase Method for the Consolidation of Investments.   

The equity method is generally used when ownership is less than 50% and higher than 20%. 

So how does it work? 

If an investee unit is consolidated using the equity method, then its individual financial statement data is not included in the consolidated financial statements. Instead, it adjusts the investment book values of the direct investor units.  

The amount of the investment adjustment corresponds to the respective investor unit's share in the equity holdings adjustments of the investee unit. Changes in investee equity (known as equity holdings adjustments) for the equity-method investee unit result in an adjustment of investment book values for the investor when running the activity-based consolidation of investments task. The equity units are not displayed in the reporting. 

Let's look at elimination postings for the equity method in a business example ABC Corporation provided to Anthony. 

The above table displays the first consolidation in December 2025 for a consolidation group. A United States company bought 30% of a Canadian company for 20000 EUR. Canada has an equity of EUR 50000, of which EUR 15000 belongs to the United States. This leaves EUR 5000 of goodwill. The net effect will be to debit goodwill for EUR 5000 and credit the investment account by EUR 5000.    

During subsequent consolidation of consolidation units (using the equity method), any of the following events can trigger an update of the equity in earnings of affiliates:   

• Recording of annual net income  
• Distribution of dividends  
• Payment of bonuses   
• Occurrence of currency translation differences  

The equity holdings adjustment data triggers an adjustment to the investment book value of the direct investor unit according to the investor's ownership percentage. 

In the example, the annual net income of the associated company Canada equals its retained earnings. This triggers the subsequent consolidation. 30% of the net income belongs to the holding and increases their investment book value. This represents an increase in the profit of the group. The increase in profit triggers the profit and loss earning effect.  

Note: In the figure above, we use the Investment Association Company FS Item for an easier understanding of how the equity value develops after the first and subsequent consolidation. 

In SAP S/4HANA Finance, you can use two different approaches for consolidating investments. 

Let's cover the differences between an activity-based and rule-based consolidation. 

Select the play button below to learn how to identify activity-based and rule-based consolidation of investments.

In SAP S/4HANA Finance, there are two methods for consolidating investments:  

• Activity-based and
• Rule-based.

Activity-Based consolidation involves the system performing consolidation calculations and postings through one automatic task in the Consolidation Monitor, based on configuration settings. Postings are categorized into activities reflecting different business transactions.  

Rule-Based consolidation involves a sequence of reclassification steps to produce consolidation calculations and postings, which the user must define in the reclassification steps. Since the steps are assigned to a reclassification method and the method is assigned to a task in the consolidation monitor, the user can run the task from there. 

As part of Consolidation of investments (C/I) activity, the investment relationships between consolidation units within the same consolidation group are eliminated. This involves eliminating a parent company's investments from the subsidiary's stockholders' equity.  

During this investment relationship, various activities or events may occur that require adjustments and elimination in consolidation. 

The following activities are supported by Activity-based Consolidation of Investments:

• Purchase Method and Equity Method
• First consolidation 
• Subsequent consolidation 
• Step acquisition 
• Capital increase and decrease 
• Partial and total divestiture 
• Partial and total transfer 
• Horizontal and vertical merger.