Functional P&L Segmentation Headline Verdana Bold A … · 2020. 5. 12. · • Control over group ETR for financial reporting • Improved intercompany flow insights • Transparent

Headline Verdana Bold

Deloitte Academy, Webinar12 May 2020

Functional P&L Segmentation A component of Operational Transfer Pricing

© Deloitte Academy 2020 2

Deloitte Academy series of webcasts

Functional P&L segmentation

• First, legal entities with multiple functional roles (egmanufacturing, distribution, finance and services) should segment their (statutory) P&L to reflect the income statement per functional role.

Define ERP requirements and End 2 End (E2E)processes

Defining the transfer pricing strategy and model

Dealing with the tax authorities

Documenting your approach and methodology

Recording outcomes in your books and recordsData

• Tax sensitized data with necessary data dimensions, suitably validated.

• Ability to easily incorporate and manipulate disparate data sources.

Processes

• Strong audit trail with clear responsibilities across functions.

• Clear and timely monitoring and adjustment processes.

People

• Correct skills set (tax, finance, IT) for now and the future.

• Clear alignment on objectives.

Overall, building blocks of a successful OTP solution

Automation of goods and services calculation

• Second, the pricing of intercompany transactions can be calculated based on (segmented) budgets. Actual margin management is key to timely identify variations in actual margins versus budgets. Automating manual tasks increase accuracy and efficiency.

Link between (O)TP and VAT/indirect tax

• Third, high variations may lead to significant TP adjustments which have VAT as well as customs consequences.

• Also, the implementation of specific TP models may have unexpected VAT implications.

System based TP audits / SAF-T

• Also, the ERP system should enable to produce audit ready files. Tax authorities are increasingly moving away from the traditional audit techniques of manual data processing, towards new and sophisticated e-audits. Tax authorities are also introducing the OECD-recommended Standard Audit File for Tax (SAF-T). ERP systems become more flexible and integrated to

facilitate automated solutions.


Your speakers today

Jeroen Lemmens

Transfer Pricing Partner

Annelies Dieusaert

Tax Technology Partner

Koen Lombaerts

Transfer Pricing Director

Antoine Mounzer

Tax Technology Senior


12 May 2020

Agenda - Functional P&L Segmentation

WHAT – Concepts

HOW – Approach

WHY – Relevance02

03

01


Background

80%of global trade is now conducted between affiliated companies *

* See United Nations Conference on Trade and Development Press Release at: http://unctad.org/en/pages/PressRelease.aspx?OriginalVersionID=113

Operational Transfer Pricing the process of reflecting the TP policy in your books and records

Stakeholders Responsibilities

Data Systems

Processes Controls Workflow

TP

analytics

I/C

true-ups

Pricing

conditions

Cost

allocations

Budget +

forecast

VAT

returns

Audit

defence

CbC

return

Master &

local file

TP

policies

BUSINESS MODEL

KEY CONNECTORS DELIVERABLES

INTERNAL EXTERNAL

Functional segmented P&Lthe process of splitting an entity’s P&L across all the entity’s functional profiles

How ?What ? Why ?


What is a functional segmented P&L

Legal entity

Business unit 1 Business unit 2 Business unit 3 …

LRD R&D G&A Agent Entrepreneur G&A Entrepreneur

Gross

Profit

OP

…

Fu

ncti

on

s

OM %Actuals

Benchmark OM %

NCP %

NCP %

NCP %

Gross

Profit

Gross

Profit

Overhead Overhead Overhead

OP OP

NCP %

Gross Profit

Overhead

OP

How ?What ? Why ?


P&L segmentation concept

Legal

entity FFM LRD R&D

Business

unit G&A Agent

LE 1

LE 1

LE 2

BU 1

BU 2

BU 3

TP functions

Gross Profit

OP

OM %

Overhead

LRD

Gross Profit

OP

OM %

Overhead

R&D

Gross Profit

OP

OM %

Overhead

Agent

Link qualitative data..

.. with hurdles

.. to financial data ..

ERP are not configured for P&L segmentation at

operational profit level by function and there no

simple “plug-and-play” solution available for TP

purposes

Required data points for P&L segmentation can

be scattered across several data sources, which

makes collecting the required data complex and

time consuming.

No formally defined procedure and tool in place

for P&L segmentation makes it often a very ad-

hoc process with limited internal controls and

extensive manual intervention.

How ?What ? Why ?


Why relevant and important

Complexity

High impact

Hand-offs between functions

Spreadsheet usage

Interaction with other taxes

Increased regulation – global and local

Stronger technology options

Better advisor expertise

Targeted audit focus

Systems-based audits

Greater public disclosure

Widening of disclosure requirements and thresholds

Further technology improvements

What’s coming

What’s new

What’s always been there

How ?What ? Why ?


P&L segmentation world heat map

ArgentinaAustriaBangladeshColombiaDenmarkFranceGermanyGhanaGreeceHong KongHungaryIndonesiaIrelandIsraelItalyMalaysiaMexicoPolandRomaniaRussiaSerbiaSingaporeUkraineVietnam

BrazilSwitzerlandUnited Arab EmiratesMoroccoTurkey

AustraliaBelgiumCanadaCroatianNetherlandsEgyptFinlandIndia JapanKenyaLatviaNorwayPakistanPanamaPortugalSlovakiaSouth AfricaSouth KoreaSpainUnited KingdomUruguay

Strict P&L segmentation requirements

P&L segmentation can be requested during audit

No P&L segmentation provisions

How ?What ? Why ?


P&L segmentation part of the transformation journey

JO

UR

NE

Y

Invoice booking in ERP

Configure master data

Run automated P&L segmentation

Analyze margins, document results

F u n c t i o n a l P & L s e g m e n t a t i o n

Automated

Lower cost

Higher value

Lower risk

Rapid execution

Invoice booking in ERP

Request data Extract and submit data

Manually transform, consolidate, analyse,

calculate, submit

Review, approve,and post

Manual

Higher cost

Lower value

Higher risk

Slow to execute

SCC Local FinanceLocal Finance Group Tax

Group TaxLocal Finance Local FinanceGroup TaxLocal Finance

How ?What ? Why ?


Benefit case

• Proactive management of tax authorities

• Control over process in case of TP audit (limited manual input, automation, etc.)

• Ability to automate the TP documentationpreparation

• Time saved to be spent on tax strategy and analytics

• Ability to assist on proactive cash flow management

• Control over group ETR for financial reporting

• Improved intercompany flow insights

• Transparent and accurate analytics per functional segment (margin analysis)

• Connectivity across departments (FP&A, tax, controlling, supply chain)

• Coordination during accounting closings (change of transfer price, recharge invoices, true-ups)

• RACI model assigning clear responsibilities for all departments involved in TP processes

Finance team

Tax team

Other teams

How ?What ? Why ?


When to discuss P&L segmentation How ?What ? Why ?

Our group is looking into finance cost reduction & finance transformation (free-up time of local finance resources & increase productivity)

Our group is looking at internal control / horizontal monitoring improvements to reduce risks and be compliant

Our group is implementing a new ERP system (SAP / CFIN implementation) and wants to look at the TP requirements (as part of the tax stream of the implementation)

Our group’s data source is scattered (many systems used, BW, ERP, Hyperion, Excel)

Our group has legal entities that encompass multiple functions from a TP perspective (e.g., limited risk distribution, provision of services, contract manufacturing, IP ownership) and is not able to gain insights in the profitability of each activity by lack of segmented P&Ls.


P&L segmentation by TP segment method example

60 %

Gross margin

Overhead

Stat

adjustment

Data type Data source1

GM by product

P&L by LE

Stat reporting data

TP

segment

[M]

TP

segment

[LRD]

TP

segment

[G&A]

Legal entity

Business unit

70 % 20 %

30 %

10 %

10 %

Derivation rules to assign GM to TP segment based on GM report data

points (e.g. customer group, material group, delivery plant, sales org,..)

Allocation rules based on allocation keys (headcount, turnover, gross profit,..)

and cost center type

Allocation rules based on allocation keys (headcount, turnover, gross profit,..)

and adjustment type (account)

How ?What ? Why ?


The backbone of the engine

Segments

• Legal entity

• Company codes

• Functions

Data Sets

• Legal entity P&L

• GL postings (EBIT level)

• GAAP To Stat Adjustments

• Data Set mapping

Data Points

• Entity/Plants

• Profit Center/Cost Center/products

• Accounts

• Counter parts

Allocation Rules

• Direct

• Indirect (via allocation keys)

• Manual

Allocation Keys

• External sources (e.g. headcounts report)

• Calculated (e.g. net sales)

Configure Upload

1. Segments

2. Data Sets

3. Data Points

4. Allocation rules

5. Allocation keys

1. Entity P&L

2. GL postings

3. Stat Adjustments

Process Export Reports

• Control & Reconciliation

• Analysis

• Reporting

1. Reconciliation items / Reclass

2. Manual allocation rules input

1. USGAAP Segmented P&L

2. Local GAAP Segmented P&L

3. Margin Analysis Reports

1

P&L Segmentation Tool

2 3 4

A B C D

E

F

How ?What ? Why ?


Technology as an enabler

Global visibility for tax authorities

Systems-based audits for TP

Public disclosures Greater pressure for ETR stability

Pressure to mitigate other tax

costs

Clear strategy and policies

Senior stakeholder integration

Strong execution into books and records

Rapid and flexible execution

Analytics and scenario planning

Well formulated controls framework

Co-ordination with Investor Relations

Tech

no

log

yHow ?What ? Why ?


Example of technology options for P&L SegmentationHow ?What ? Why ?

Fit with the process

Fit with the people

performing the process

Fit with the technology

landscape

Cost of ownership

(implementation, license,

training)

Audit trail & risk

avoidance

++

Excellent Poor


P&L segmentation tool exampleHow ?What ? Why ?


Where have we done this before

Case 2

Case 1 Case 3

Where did we assist ?

Automating the calculation of transfer prices per product and supply chain flow

Automating and streamlining the intercompany cost recharge processes (and the related budgeting)

Putting in place an audit trail to help defend the calculations and processes during TP audits

Client challenges

The client was suffering from very high year-end true-ups due to transfer prices on services and goods that were calculated only at the start of the financial year in a very simplistic way.


Putting in place a P&L segmentation tool to automatically split the entity's P&L between the different routine function margins per business unit

Assessing pain points related to their current cost recharge processes

Putting together a business case to convince internal stakeholder of the need of a more centralized and standardized cost recharge process

Client challenges

Our client needed to provide the local tax authorities with a functional P&L segmentation in light of the recent TP legal requirements


Client challenges

The client had issues controlling the transfer prices set between the routine distributors and manufacturing entrepreneurs due to the lack of financial and supply chain visibility.

Integrated the supply chain links and product costing of every SKU within the legal entity in a calculation model

Segmenting the P&L per product sold and selling entity to visualize the margins per SKU

Linking back the P&L per product sold and selling entity to the TP function to finalize the P&L segmentation

How ?What ? Why ?


What’s next

Brainstorm for areas with these characteristics

• Voluminous data

• Significant time spent manipulating data

• Analysis on recurring basis

• Scenario analysis of alternatives

• Identification of most suitable technologies

Identify opportunities

Think big

Prioritize opportunitiesbased on

• Value

− Time savings/capacity enhancements

− Benefits derived

• Risk

• Ease of implementation

− Cost

− Data availability

− Resources

Pick one or two areas of focus

Start small

Get started with a proof of concept to help

• Socialize the benefit

• Identify hurdles and risks

• Identify available assets

• Educate on tools and change management

Prove it works(proof of concept)

Act fast

Next step: Consider a structured lab environment

How ?What ? Why ?

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© Deloitte Academy 2020

Documents

Functional P&L Segmentation Headline Verdana Bold A … · 2020. 5. 12. · • Control over group ETR for financial reporting • Improved intercompany flow insights • Transparent