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SAP S/4HANA Finance: Understand the Different Options and Nuances of Enabling Parallel Accounting in New Asset Accounting

by Ravish Prabhu, SAP FI/CO Senior Consultant, Infosys Limited and Phani Kiran Bandaru, SAP FI/CO Consultant, Infosys Limited

January 18, 2017

Learn about the configuration options available in SAP S/4HANA Finance to set up parallel accounting aligned to different accounting principles, especially when you are migrating from classic Asset Accounting (FI-AA), a parallel accounts approach, to the new FI-AA module.


Large businesses that have operations in multiple geographic areas have to comply with varied accounting regulations as per law. With International Financial Reporting Standards (IFRS) becoming the standard of reporting for consolidated financial statements and a few countries such as China, Mexico, Brazil, and India having their own accounting standards and different reporting periods, it is imperative for large businesses to record daily transactions in more than one accounting principle.

These large corporations are required to report consolidated financial statements as per IFRS or US Generally Accepted Accounting Principles (GAAP) regulations and also need to prepare financial statements of their subsidiaries per local GAAP and tax accounting requirements of their country of operation. These different accounting guidelines necessitate assets to be valued and reported differently.

To begin with, we describe different business functions in the asset life cycle along with certain key concepts such as asset class and chart of depreciation.

(Note: If you are already familiar with asset-related business functions, you can skip to the section “SAP S/4HANA New FI-AA.”)

The Business Process in Asset Accounting

An asset can be tangible or intangible property owned by a company that is expected to provide future economic value and cash flows. The tangible assets in the business include land, machines, furniture, equipment, and hardware. Intangible assets could be patents, copyrights, and computer software applications.

An asset life cycle begins with the asset’s acquisition. It may be purchased from an external source or constructed in house. In the case of assets under construction, it needs to be settled to a fixed asset before being put into use. In integrated asset acquisition, assets are capitalized through invoices based on purchase orders (POs). In a non-integrated acquisition, a clearing account is used as an offsetting account instead of a vendor.

After an asset is capitalized, it is depreciated periodically during its useful life. When an asset is no longer needed or used, it is retired. Retired assets can be sold to external customers (integrated with the Accounts Receivable [FI-AR] module) or may be scrapped.

An asset can also be transferred to other companies in the group (intercompany transfer) or transferred to other plants (intracompany transfer). Assets can be revalued to adjust to market price. These business transactions of an asset must comply with international accounting standards, local GAAP, and tax reporting requirements.

Figure 1 shows different transactions in the asset accounting life cycle.


Figure 1
Asset life cycle overview

To classify assets based on legal and management requirements, asset classes should be defined. Each asset must belong to only one asset class. This defines the integration with the General Ledger Accounting (FI-GL) sub-module through account determination along with other control parameters such as number ranges and screen layout.

Asset valuation and depreciation processes are controlled by a chart of depreciation that is defined at the country level. This chart contains the definition of a depreciation area and depreciation key parameters. The default values for depreciation key, useful life, and depreciation screen layouts can be defined per asset class for a chart of depreciation. These values are in turn inherited by assets.

With this background about asset accounting, you are ready to learn the new features in the SAP S/4HANA Finance new FI-AA and examine the different options available for implementing parallel accounting.

SAP S/4HANA Finance New FI-AA

In the SAP S/4HANA Finance system, the FI-AA module is redesigned to provide more flexible, transparent, and simple features for handling asset transactions and reports. Here is a list of the salient features:

  • Leading valuation can be any area (no longer restricted to the 01 depreciation area) – each area is treated equally and independently
  • Areas can post APC in real time (no more periodic APC posting runs), thus providing real-time integration with the FI-GL sub-module
  • Only one depreciation area per valuation (a delta valuation area is not needed)
  • New transaction codes allowing depreciation-area-specific postings
  • Drill-down reporting feature for reports
  • New data modelling with a single line item table for asset transactions and real-time calculation of planned depreciation values

With these new features, parallel accounting can be implemented in SAP S/4HANA Finance with each depreciation area representing an accounting principle. In the next section, we explain what parallel accounting is, the approaches for adoption of parallel accounting in the S/4HANA Finance system, and the features of these approaches.

Parallel Accounting in Asset Accounting

Generally, businesses require assets to be valued in different accounting principles. These valuations could be for legal authorities or reports to be submitted for tax authorities. To facilitate this requirement, the SAP system provides depreciation areas in a chart of depreciation along with depreciation calculation parameters such as depreciation methods.

However, when you design and define depreciation areas, you also need to consider whether financial statements are required for those valuations. If financial statements are required, such areas should post values to the SAP General Ledger accounts, thus integrating the asset sub-ledger with the FI-GL sub-module.

In the SAP S/4HANA Finance new FI-AA system the following approaches are available for parallel accounting:

  • Accounts approach
  • Ledger approach
  • Dual approach (accounts and ledger approach)

In the following sections, we describe the various features of the accounts and ledger approaches in SAP S/4HANA Finance new FI-AA version. Based on our experience of upgrading to the SAP S/4HANA Finance system from ECC 6.0 classic G/L, we outline the limitations of continuing with the accounts approach or adopting the ledger approach in the new SAP S/4HANA Finance system. We also introduce the dual approach and explain how it is an optimal solution for parallel accounting while upgrading from ECC 6.0 classic G/L to the SAP S/4HANA Finance system.

The Accounts Approach

In the accounts approach a unique range of G/L accounts in SAP S/4HANA Finance is used to record common valuation, group valuation (US GAAP or IFRS), and local valuation (local GAAP). This approach requires a significantly large number of accounts as each valuation needs a separate range of G/L accounts to record business transactions.

The chart of accounts needs to be designed to easily identify and post valuation-specific, common transactions to the correct set of G/L accounts and also to facilitate easy reporting. A special-purpose ledger needs to be set up for local reporting needs in a different fiscal year than that of the group reporting. Therefore, the multiple ledgers option provided in the SAP S/4HANA Finance system is left unutilized if a client decides to use the accounts approach in SAP S/4HANA for parallel accounting.

In this approach, all depreciation areas are assigned to leading ledger 0L as shown in Figure 2.


Figure 2
Accounts approach: assign only the leading ledger 0L

Figure 3 shows how a separate range of accounts for different valuations is posted in the accounts approach, but within the same ledger.


Figure 3
Accounts approach: a separate range of G/L accounts

The accounts approach can be used for parallel accounting in SAP S/4HANA Finance if all company codes have the same fiscal year period for local reporting as that of group reporting.

The Ledger Approach

Unlike the accounts approach, in the ledger approach each valuation is recorded in a separate ledger. All such ledgers share the same set of G/L accounts. Leading ledger 0L can be used to valuate a consolidation principle, such as IFRS or US GAAP, and it should be assigned to all company codes. An additional ledger has to be created for local reporting needs of specific entities.

To report local valuation in a different fiscal year, the corresponding non-leading ledger has to be assigned to an appropriate fiscal year variant in customizing. Company codes also need to be assigned to this ledger.

Figure 4 shows a 1:1 relationship between the depreciation area (accounting principle) and the ledger.


Figure 4
Ledger approach: a single ledger for each valuation

All ledgers share the same set of G/L accounts as shown in Figure 5.


Figure 5
Ledger approach: ledgers share the same set of accounts

The ledger approach is recommended for parallel accounting in the following scenarios:

  • A greenfield SAP S/4HANA Finance implementation
  • Upgrading to SAP S/4HANA Finance from ECC 6.0 SAP General Ledger system where the ledger approach was currently being used for parallel accounting
The Dual Approach

While upgrading to SAP S/4HANA Finance from ECC 6.0 classic G/L system, a business can decide to retain all customizations related to the accounts approach and selectively use the ledger approach for a few company codes. This approach is referred as the dual approach. In this approach, a few company codes use the dual approach and the rest of the company codes use the accounts approach for implementing parallel accounting.

Moreover, the criterion for choosing the accounts approach or dual approach for a company code is the fiscal year period of local reporting. If the fiscal year of local reporting is different from the group reporting fiscal year, the dual approach should be configured for such a company code. In this case, local valuation transactions are posted to the non-leading ledger with the local range of G/L accounts.

As depicted in Figure 6, company codes with local reporting in a different fiscal year than that of the group reporting would follow the dual approach and the company codes with local reporting in same fiscal year as that of the group reporting would follow the accounts approach.


Figure 6
Approaches for parallel accounting

The benefits of the dual approach are listed below.

Benefit 1: The chart of accounts redesign is not needed anymore. Earlier versions of a chart of accounts with separate ranges for local, group, and common valuations can be used as they are. There won’t be any changes needed for G/L account ranges as in the case of the ledger-only approach.

Benefit 2: The dual approach provides transparent, simple valuation for local reporting in a different fiscal year. Since non-leading ledgers record parallel valuations for company codes with different fiscal years, the special-purpose ledger setup is not required by design. This reduces considerable technical effort and custom transactions to fetch reports from special-purpose ledgers. Standard SAP S/4HANA Finance reports and functions can be used to prepare local reporting needs, thus simplifying the process for business users.

Benefit 3: No changes to customizing of account determination setup. Retaining the chart of accounts design eliminates analysis and revision of already set up account determination details. This reduces efforts in the customizing setup.

Benefit 4: The migration process is easy. While you are migrating balances or line items, the same set of G/L accounts are used, but with either a leading or non-leading ledger (in case of local accounts). This greatly simplifies the mapping process and post-migration check activities.

Benefit 5: Optimal use of the SAP S/4HANA Finance ledger functionality. The dual approach uses a leading ledger for group reporting and a non-leading ledger for local reporting in different fiscal years, respectively. The design choice of using ledgers based on a fiscal year period of reporting effectively uses the ledger concept, enabling the new SAP S/4HANA Finance system to continue using the accounts approach as well as it greatly simplifies and standardizes local reporting.

Upgrading to SAP S/4HANA Finance from the ECC 6.0 Classic G/L System A Comparative Study

Having discussed the various options available in the SAP S/4HANA Finance system for implementing the parallel accounting, we now compare the three parallel accounting approaches (accounts, ledger, and dual) for the following scenario and see which approach is best suited  when the company decides to upgrade its ECC 6.0 classic G/L system to an SAP S/4HANA Finance system.

A multinational US company has operations in various countries, including China, Mexico, and Brazil. This US company does group reporting in a US GAAP principle in an October-September fiscal year and local GAAP reporting for China, Mexico, and Brazil subsidiaries in a January-December fiscal year. Further, the company was using the accounts approach for group reporting and a special-purpose ledger for local reporting in the ECC 6.0 classic G/L system.

To implement parallel accounting in the SAP S/4HANA Finance system, the company can either continue to use the existing accounts approach or can go for a greenfield implementation with the ledger-only approach. However, each of these approaches in the new SAP S/4HANA Finance system doesn’t provide an optimal solution for parallel accounting for the reasons explained in the following section.

Continue to adopt the accounts approach: In this case, in the new SAP S/4HANA Finance system there are no changes required for G/L accounts setup in asset account determination or foreign currency valuation. Businesses can continue to use the same set of G/L accounts for posting various business transactions as they were doing earlier requiring no additional training. All the postings use leading ledger 0L only.

However, for local reporting in a different fiscal year, you need to set up an external customized reporting solution or a special purpose ledger (FI-SL). Thus, this option completely ignores the ledger functionality that the SAP S/4HANA Finance system provides, including associated features such as ledger-specific transaction codes. Therefore, it is not an optimal choice.

Greenfield implementation with a ledger-only approach: In this approach, the existing chart of accounts design should be revised to harmonize the G/L accounts by removing the separate account ranges maintained for common and local reporting needs. This exercise may also involve analyzing mapping to a group chart of accounts and alternate accounts and updating G/L master data.

In all customizations containing the accounts approach, G/L ranges should be updated with new accounts (for example, in asset classes account determination and foreign exchange [forex] valuation accounts customization).

The asset data migration process should correctly transfer open item and G/L balances from common, group, and local account ranges to respective new accounts in the SAP S/4HANA Finance system along with the correct ledger posting. This process involves significant mapping activities and analysis for posting to the correct ledger. Furthermore, if migration involves transactional data, the processes for mapping accounts, postings with the correct ledger, and migrated data verification activities become much more complex and time-consuming.

These activities require significant changes to existing template designs and involve comprehensive build and testing efforts stretching the overall project timeline and cost.

The dual approach: In this approach the company would continue to use the accounts approach for group reporting and it would replace the special-purpose ledger with a non-leading ledger for calendar year local GAAP reporting. All company codes would be assigned to leading ledger 0L with an October to September fiscal year variant to report US GAAP. Only the company codes in China, Mexico, and Brazil would be assigned to an additional ledger (for example, Z1), with the fiscal year variant K4 (calendar year) for local GAAP reporting.

By adopting this approach the company can use the same chart of accounts as in the ECC 6.0 classic G/L system and therefore the configuration of G/L accounts in forex valuation accounts or accounts such as asset balance sheet, depreciation, or valuation do not need to be changed. Therefore, this method adopts the best of accounts and ledger approaches and at the same time significantly reduces effort in customization and migration activities while upgrading to the SAP S/4HANA Finance system from the ECC 6.0 classic G/L system.

In the next section, configuration details of the dual approach and practical examples of parallel accounting in a few business transactions are provided for better understanding.

Configuring Parallel Valuation in New FI-AA

This section provides details of important customization that is required to implement the dual approach in the SAP S/4HANA Finance system. Other general configurations are not covered.

Configuring the Accounting Principle

The first step involves defining accounting principles. Based on the group, local country reporting needs these statistical principles to be defined.

The IMG menu path for this setup is Financial Accounting (New) > Financial Accounting Global Settings (New) > Parallel Accounting > Define Accounting Principles. As shown in Figure 7, the accounting principle for US GAAP has been defined. As per the business requirements multiple accounting principles can be defined by clicking the New Entries button.


Figure 7
Define accounting principles

Next, the accounting principle has to be assigned to a ledger group. The IMG menu path for this setup is Financial Accounting (New) > Financial Accounting Global Settings (New) > Parallel Accounting > Assign accounting principle to ledger groups.

In the screen the system displays (Figure 8), you assign the USGP accounting principle to the 0L ledger by clicking the New Entries button and selecting USGP in the Accounting Principle field and 0L in the Target Ledger Group field.


Figure 8
Assign accounting principles to ledger groups

The depreciation areas also should be assigned to appropriate accounting principles. To assign an accounting principle to a depreciation area, follow IMG menu path Financial Accounting (New) > Asset Accounting (New) > General Valuation > Depreciation Areas > Define Depreciation Areas or use transaction code OADB. This action displays the screen in Figure 9.


Figure 9
Define depreciation areas

Note that the target ledger group in the setup in Figure 9 is derived by the system as per the configuration shown in Figure 8.

With the introduction of the basic configuration steps, let’s understand in a detailed manner how the SAP S/4HANA Finance system can be set up for the accounts approach as well as for the dual approach.

In the accounts approach, the system posts the US GAAP as well as the local GAAP documents in a single ledger (i.e., the leading ledger but to a unique range of accounts). Therefore, we need at least two accounting principles — one for US GAAP and the other for local GAAP reporting (same fiscal year). These two accounting principles are assigned to the 0L ledger only.

In the dual approach, the US GAAP document would be posted to the leading ledger as in the accounts approach, but the local GAAP document needs to be posted to the non-leading ledger. Hence, another accounting principle is required to facilitate the local GAAP posting (different fiscal year) in non-leading ledger.

Thus, three accounting principles should be defined as per the IMG menu path mentioned in the above section “Configuring the Accounting Principle.” These principles are shown in Figure 10.


Figure 10
Accounting principles definition

Table 1 lists the three accounting principles shown in Figure 10 with a description for each.

LGAP

Accounting principle for legal entities with local reporting in the same fiscal year as that of the parent company (accounts approach)

LOGP

Accounting principle for legal entities with local reporting in calendar year (dual approach)

USGP

Accounting principle for group reporting

Table 1
Accounting principles

Let’s see how the ledgers and ledger groups should be set up for the accounts and dual approach.

The IMG menu path for assigning ledgers to ledger groups is Financial Accounting (New) > Financial Accounting Global Settings (New) > Ledgers > Ledger > Define Ledger Group. As shown in Figure 11, Ledger group Z2 is defined for the accounts approach and leading ledger (the field under the Ld column) 0L is assigned to it.


Figure 11
Z2 Ledger group assignment

As shown in Figure 12, Ledger group C1 is defined for the dual approach and two ledgers have been assigned to it (the leading ledger 0L and non-leading ledger Z1).


Figure 12
C1 Ledger group assignment

Table 2 summarizes the ledgers assignment to a ledger group and the ledger group assignment to an accounting principle.

Accounts approach

Dual approach

Accounting principle

LGAP

LOGP

Ledger group

Z2

C1

Target ledgers

0L

0L and Z1

Table 2
Summary of ledger group and ledgers assignment

After you assign appropriate ledgers to a ledger group and then the ledger group to an accounting principle, you need to assign the accounting principle to a depreciation area. This setup is at the chart of depreciation level.

In the accounts approach, the US GAAP depreciation area (i.e., 01) is assigned to accounting principle USGP and local GAAP depreciation area (i.e., 30) is assigned to accounting principle LGAP. This is shown in Figure 13.


Figure 13
Chart of depreciation definition for the accounts approach

In case of the dual approach, the local GAAP depreciation area (i.e., 30) would be assigned to accounting principle LOGP as the local GAAP document should be posted to the non-leading ledger with a different fiscal year. These settings are shown in Figure 14.


Figure 14
Chart of depreciation definition for the dual approach

The restriction regarding the fiscal year of the depreciation area still holds in SAP S/4HANA Finance (i.e., the start/end dates of fiscal year of depreciation areas should be equal). Hence, the C1 ledger group contains a leading ledger as the representative ledger.

With an understanding of these customizations, the asset acquisition and depreciation transactions are explained in the next section to highlight parallel accounting entries and how these are posted in the accounts approach and the dual approach.

Parallel Accounting Flow in New Asset Accounting

In this section, we explain the differences in the accounting flow between the accounts and dual approach. These differences are seen across all transactions involved in an asset life cycle. However, for illustration in this article, let’s take asset acquisition as an example.

Asset Acquisition

Let’s consider the case in which an asset is acquired by integrated acquisition (through a vendor). In SAP S/4HANA Finance new FI-AA, the transaction is split into an operational part and a valuating part. The operational part is common to all accounting principles, whereas the valuating part is posted to each accounting principle.

In the operational posting document, the technical clearing account (TCA) is debited with an offset to Accounts Payable (AP). Two valuating documents would be posted, one each to US GAAP and local GAAP.

(Tip! A TCA is a new concept introduced in SAP S/4HANA Finance. When an asset is acquired from a vendor (integrated acquisition), the system posts two types of documents. One is an operational document and the other is the valuation document to each depreciation area (accounting principle) that posts to FI-GL. In the operational document, the vendor account is offset by a TCA (instead of an asset). In the valuating document, the technical clearing account is cleared and the asset is capitalized. This account should be configured as an asset reconciliation account and can be configured at the client level or asset class (account determination) level. For more information, refer to standard SAP documentation in menu path Financial Accounting (New) > Asset Accounting (New) > Integration with General Ledger Accounting > Technical Clearing account for Integrated Asset Acquisition > Define Technical Clearing account for Asset Acquisition.)

In the accounts approach, both valuating documents are posted to the leading ledger, but to a unique range of accounts.

In the dual approach, the US GAAP document is posted to the leading ledger, whereas the local GAAP document is posted to a non-leading ledger as well.

Table 3 shows the asset acquisition integrated posting for the accounts approach by means of T accounts. Assume the asset acquisition cost is $15,000.


Table 3
Asset acquisition integrated posting in the accounts approach

As shown in Table 3, the operational document is posted in the leading ledger. A sum of $15000 is credited to AP and offset to the TCA.

Simultaneously, the system posts valuating documents in US GAAP and local GAAP in the leading ledger only, but with a different range of G/L accounts. The US GAAP valuating document debits asset APC and clears the TCA. Whereas the local GAAP valuating document debits the local account of asset APC and credits to the contra balance sheet (B/S) account.

In the dual approach shown in Table 4, however, the operational document is posted to leading and non-leading ledgers and the valuating document for US GAAP is posted to the leading ledger with a range of G/L    accounts for group valuation. Moreover, the local GAAP document is posted to leading and non-leading ledgers with a range of G/L accounts for local valuation.


Table 4
Asset acquisition integrated posting in the dual approach

We can further observe that under the accounts approach, the TCA always balances to zero, whereas in the dual approach, the TCA is offset by a contra B/S account.

To provide further clarity, the accounting flow by means of an actual posting in the SAP S/4HANA Finance system is explained in the next section.

Integrated Asset Acquisition in Accounts Approach

In new FI-AA, with transaction code F-90 acquisition postings are done in real time in all depreciation areas that post to FI-GL. As shown in Figure 15, the SAP S/4HANA Finance system posts one operational document (100000005) and simultaneously posts valuation documents in ledger group 0L for US GAAP and Z2 for Local GAAP, respectively.


Figure 15
Integrated asset acquisition posting - operational document

In Figure 16, asset acquisition in the US GAAP principle (0L ledger) is posted to a unique range of accounts (i.e., 7* series APC account for US GAAP).


Figure 16
Integrated asset acquisition posting - US GAAP document

Asset acquisition in the local GAAP principle (0L Ledger – Same fiscal year period) is posted to the 8* series APC account for local GAAP as shown in Figure 17.


Figure 17
Integrated asset acquisition posting - local GAAP document (same fiscal year)

Integrated Asset Acquisition in the Dual Approach

As shown in Figure 18, in the dual approach the SAP S/4HANA Finance system posts operational document (100000004) and valuation documents to 0L ledger (7* series) and Z1 ledger (8* series) for US GAAP and local GAAP, respectively.


Figure 18
Integrated asset acquisition posting - the dual approach

The local GAAP document is posted to the ledger group C1 (i.e., to ledgers 0L and Z1 with accounting principle LOGP) as shown in Figure 19.


Figure 19
Integrated asset acquisition – local GAAP document (dual approach)

Note that ledger Z1 of ledger group C1 – posted with local range accounts (i.e., 8* series accounts) are posted in period 11/2016 (calendar year).

Asset Depreciation Postings in the Accounts Approach

For a depreciation run, the system posts ledger-specific documents based on accounting principles.

For example: The fiscal year of local reporting of company code 5670 is the same as group reporting. Hence, this company code is set up with the accounts approach for parallel accounting.

Figure 20 shows depreciation postings in US GAAP (0L ledger – 7* series), and Figure 21 shows depreciation postings in the local GAAP (0L ledger - 8* series).


Figure 20
Depreciation postings - US GAAP document (accounts approach)


Figure 21
Depreciation postings - local GAAP document (accounts approach)

Asset Depreciation Postings in the Dual Approach

Similarly, for the dual approach, two documents are posted, one each for US GAAP and local GAAP. The local GAAP document is posted to the ledger group C1, which has non-leading ledger Z1 (Figure 22).


Figure 22
Depreciation postings - local GAAP document (dual approach)

The Z1 ledger with the calendar year fiscal year variant posted with 8 series G/L accounts will be used for local reporting purposes.

All other asset transactions will be posted in a similar manner with the accounts approach and dual approach based on the fiscal year of local reporting needs.

To summarize, the dual approach leverages benefits of both accounts and ledger approaches to provide a convenient, efficient, and simple way to handle multiple reporting needs. This approach provides an optimal solution to parallel accounting compared with accounts-only or ledger-only approaches during an upgrade to SAP S/4HANA Finance from ECC 6.0 classic G/L with accounts approach.

The features of the SAP S/4HANA Finance new FI-AA module, coupled with the dual approach for parallel accounting, enable business users faster, cost-effective transition to the SAP S/4HANA Finance landscape and real-time access to multiple legal and tax reports.

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Ravish Prabhu

Ravish Prabhu is an SAP FI/CO senior consultant at Infosys Limited. He has more than 10 years of IT experience and more than six years of consulting experience in SAP FI/CO. He has been a part of multiple SAP implementations and rollouts in different geographies and is currently working on an SAP S/4HANA Finance implementation project. Ravish holds a bachelor’s degree in computer science and a post-graduate diploma in finance management.


Phani Kiran Bandaru

Phani Kiran Bandaru is an SAP FI/CO consultant at Infosys Limited. He has more than eight years of IT experience working on diverse areas in SAP Financials and Controlling. He has been a part of multiple SAP projects and is currently working on an SAP S/4HANA Finance implementation project for Johnson Controls. Phani holds a master’s degree in business administration.



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