Since many companies, large and small, are often divided into multiple legally independent entities with complex delivery and service relationships, Intercompany Charging remains an ongoing challenge. Generally, Intercompany Charging presents the following challenges:
- The provided intercompany services must be trackable and invoiced according to the actual costs incurred;
- Legal conditions (e.g. regarding profit shifting) must be met;
- Internal Service Level Agreements must be considered;
- In international contexts, exchange rate issues come into play.
In this blog post, I share best-practices for Intercompany Charging of services among separate legal units of an organisation. This is based on a customer case, in which we helped our customer improving their Intercompany Service Charging process.
When you should consider Intercompany Charging
From a general Business Management perspective, Intercompany Charging can be done for various cost types in many different business cases. Our customer, however, did the intercompany charging to allocate costs of provided services, solving tasks across the different affiliates in their international group.
As such, the following cost types were subject to possible charging within our customer’s group:
- general administrative costs
- marketing costs
- logistical processing costs
- personnel costs
- research and development costs
- production waste costs
The organisational units involved were the different so-called Shared Service Centres, as well as corporate units operating outwardly.
This business process consisted of determining services provided, assessing their value and issuing the corresponding invoices. Particular problems arose from currency conversion because the various organisational units were located in different currency zones.
Our customer asked us to find an IT solution, compatible with their SAP ERP system, to automate this process as much as possible. Additionally, the users still needed to be able to control the process and, where necessary, take corrective action.
An Intercompany Charging process that meets your needs
We quickly realised that many of the above-mentioned requirements were already supported in SAP ERP. The best solution for these specific needs was SAP Resource-Related InterCompany Billing (SAP RRICB). This tool enables Intercompany Charging of services provided, particularly at month-end closing. For this, it uses the CO transfer postings that are done between different company codes and that take place during the current month.
How we improved the Intercompany Charging process
The process implemented by our consultants begins with cross-company code cost allocation within Controlling (e.g. between cost centres and orders). The particularity here is that the credited cost object and the cost object to be debited come from different company codes and thus also belong to different affiliates in the group.
These postings are made by the users during the course of the month. At month-end close, the corresponding billing is carried out through an external billing procedure in the SAP CS module. For this, every possible relationship between the affiliates in the international group is set in a framework contract in the SAP SD module. The Resource-Related InterCompany Billing (RRICB) function, which is already available in the SAP Standard, is then used to determine all of the month’s cross-company code transfer postings which are then allocated to so-called service materials. Next, a debit memo request is generated related to the framework contract for the service materials. A defined price determination (including surcharging and VAT) takes place for these service materials, after which the debit note is generated. This debit note represents the invoice from the issuing group company while an incoming invoice is automatically posted through EDI messages by the receiving group company.
In short, based on cross-company code cost allocations, outgoing and incoming invoices are generated automatically for legal accounting reasons.
A PIKON SAP Add-on, improving the standard
In order to implement this improved process, we chose the following standard components from the RRICB tool:
- Reconciliation Ledger: this was used to increase visibility of the different currencies, used by the group’s individual subsidiaries across different countries (this is needed in ECC 6.0, but not in SAP S/4HANA thanks to its new approach).
- DIP (Dynamic Item Processing): Configuration based on cost elements and profit center allocation.
- Settings for contracts, relating to credit and debit notes in the SAP SD module
- Advanced Pricing Procedures and Account Determination: In this way, we ensure that the reconciliation accounts were properly offset (reading of actual accounts) and, at the same time, we were able to include conditions to take account of revenues, costs, surcharges and VAT.
- Different reporting profit centres: revenues and costs can be displayed here, broken down by business unit (incl. corporate segment).
- Integration in SAP CO-PA: CO-PA tables are used as data sources for Business Intelligence. Because of that, the same revenue-cost structure must be represented at customer and service level (more detailed than in FI documents).
- Creation of legally compliant invoices to fulfil legal requirements.
Additionally, we have programmed the following custom functions to supplement the standard functions:
- Extension of the permitted CO Business Transactions to enable allocation across the entire organisation (including cost objects that are not available in the SAP Standard);
- Validation rules between the issuing and the receiving affiliate. Validation takes place both during the allocation of planned costs and during the allocation of actual costs based on business transactions and cost objects;
- Another function prevents multiple contracts being created between the same affiliates;
- Reposting of currency differences;
- EDI settings to ensure postings in the receiving company are reflected automatically.
The result: a more streamlined, automated Intercompany Charging process
Thanks to this unique combination of enhanced SAP standard functions, designed specifically to serve our customer’s needs, we could provide our customer with a state-of-the-art solution for their Intercompany Charging process of services.
Our customer now has an automated process that complies with both legal and internal requirements. Moreover, it prevents unauthorised or incorrect SAP CO allocations thanks to the extended validation approach. Currency differences are also assigned automatically. The new process makes monthly closing faster, more secure and efficient.
In addition to Resource-Related InterCompany Billing (SAP RRICB) we offer our customers further options the ensure the monthly closing goes smoothly and, at the same time, free up employees from redundant, error-prone processes. One such option is the SAP Financial Closing Cockpit, which we have already successfully implemented at other customers.