Leveraging Divisional Financial Reporting in S/4HANA
Most SAP customers are currently either planning to or are in the process of moving to the S/4HANA platform. Finance departments in this process state the objective of achieving better financial reporting to enhance decision-making capabilities. With the pre-requisite for moving to S/4HANA being to utilise the New General Ledger functionally, this is the first stage in the journey to achieving enhanced financial reporting and enables the extended functionalities in S/4HANA to be leveraged on a solid foundation. We should note that the New GL migration can be performed either as an early project within an ECC environment or as part of a brownfield S4 implementation, while also taking into consideration that the final configurations will also be required in a greenfield S4 implementation.
In Finance, one of the key points in early discussions on a project is the requirement for divisional (or segmental) Profit & Loss Statements, Cash Flows and Balance Sheets to enable decision-making by understanding the growth, risks, and profitability of each segment. With time pressures on projects often resulting in these objectives priorities being lowered (or completely removed), it is important that the benefits are effectively tracked from projection initiation through to go-live.
The core principle that should be highlighted is, regardless of the type of project you are embarking on, the structure of how you wish to report should be decided upon before commencing on solution design to enable an end state vision. We will look at how to achieve full segmental financial statements in S/4HANA in all scenarios (Greenfield implementation, Brownfield implementation, or preparatory New GL conversion).
Core Design (Segments/Profit Centers/Document Splitting/Parallel Accounting)
New General Ledger functionality includes Document Splitting, Segmental Reporting, Parallel Ledgers, and Valuations. Whether upgrading in ECC from Classic General Ledger to New General Ledger, upgrading to S/4HANA in a brownfield implementation, or performing a greenfield implementation, the journey to the final financial accounting should never be considered a technical upgrade but as an opportunity to perform an overhaul on how the company’s financial statements are produced.
- Parallel Accounting
In General Ledger Accounting, parallel accounting is used to run several parallel ledgers (general ledgers) for different accounting principles (e.g., IFRS and local GAAP). During posting, you can post data to all ledgers, to a specific selection of ledgers, or to a single ledger.
- Segmental Reporting
A segment can be used according to the business’s reporting needs and can reflect a product/product line and/or a geographical region. If we take a common approach example where each geographical region is represented by way of legal entity, the focus is then moved to a management accounting viewpoint. With S/4HANA, we understand that the core master data elements have now been incorporated into the S4 General Ledger (Segment and Profit Centre Accounting) which allows us to post both to the correct legal entity and adopt the segmental approach. The below diagram illustrates the postings both to legal entity and how the postings sit within the reporting structure to provide the required financial statements (Legal view and a view for the segment, in this case, the Pharmaceuticals Segment).
So, in structure definition, we bear in mind that the legal entity reporting is focused on the Company Code(s) within a Country, whereas the reporting level includes the cross-company code objects Profit Centre the Segments to which they roll up to. This then enables the production of the financial statements in a matrix format regardless of the legal entity or geographical location (although the geographical location can indeed form part of the segmental design if desired). It is also worth noting that the functionality is applicable for company codes including a production element where indirect costs can be allocated by a traditional method (assessments and distributions) to provide a more accurate view of the profitability of the segment. The nature of companies A and B in the diagram is for illustrative purposes only rather than an association with direct/indirect postings.
With the structure now in place. We face the historical problem of data completeness within the reports. This is achieved by utilising a consultative approach (and often iterative depending on complexity of business processes) in the design phase to ensure the below functionalities are correctly configured (and in some cases developed) to capture all required information.
- Document Splitting (baseline)
Document splitting is used to automatically generate the required (posting) line items with the correct segment allocation. To function, it requires some configuration to know how it is to determine the correct line-item postings. It is important to understand the difference between what the user enters (entry view) and what will be posted as financial line items (Document Splitting view). If we take an example of a vendor invoice manually entered, the 2 relevant views of the posting would be as follows.
Document splitting can be used to ensure that most entries are correctly posting to relevant segmental balance sheets and P&L Accounts. S4 also offers the possibility of a zero-balancing option, where one (or multiple) zero balancing accounts can be set up to capture and lines cannot be determined by the characteristics and, in some cases (such as payroll postings) to make a summarised entry. In my view, the zero-balancing option can be very useful for completeness depending on reporting requirements, although as it does act primarily as a balance sheet prepayment/accrual, depending on relevance, further consideration should be given to identify the nature of these items as described below.
- Document Splitting (extended)
Where items are not able to be classified and posted by the standard configuration of document splitting, we are able to create Document Splitting Methods and Rules for the client to add granularity at a line-item level and ensure that all postings are on the appropriate GL Accounts. This step is performed during the design phase of the implementation.
Utilising S/4HANA Functionality
- Introduction the Universal Journal
The Universal Journal is introduced with S/4HANA to effectively combine the data from Financial Accounting, Controlling, Material Ledger, and Asset Accounting into a single source of the truth. This has many self-evident benefits including:
- Making reconciliations redundant.
- Reduction in data redundancies.
- Single entry of line items.
- Easier faster interrogation for reporting purposes (using a new internal database design in S/4HANA) with no requirement to store totals tables.
The focus for mentioning the Universal Journal here is for completeness. In ECC versions, if migrating to New GL with document splitting active (or activating document splitting retrospectively), SAP introduced a separate set of tables which facilitated document splitting but did little in terms of enhancing the reporting capabilities and database design. In S/4HANA the changes are a larger modification (incorporation of Universal Journal) to unify information from multiple sources in a unified table with a different structure. The result in the database redesign affects reporting as the interrogation of line items is greatly enhanced to the point totals tables are no longer needed and the queries can be performed at runtime. This eliminates the need for any data extraction, transformation, or loading into a data warehouse. Our financial statements can now be produced live across different views.
- Extensibility Fields
With the main structures in place for both legal and segmental views of the company, if, during the design phase of the project, it is identified that further structures are required for reporting, S/4HANA provides extensibility options within the Universal Journals Coding block to add additional fields. These should only be considered and discussed with the consulting team as they may require extensive effort to utilise correctly.
- Extension Ledgers
Extension Ledgers are additional ledges (or delta ledgers) that supplement the standard ledger for reporting purposes. This helps us to accurately adjust the financial reports for the following cases:
- Tax Amendments to reach a tax deducted profit and loss.
- Any adjustment entries after financial closure.
- Internal adjusts for management accounts.
The Final Touches
We are now in a position where we have all our postings ready to report on by both Legal Entity and Business Segment. But what if you do have requirements that stop those postings due to a vital process that cannot be modified? Well, SAP does provide us with some tools for this as standard. These are options we take into consideration during the design of the solution, and include but are not limited to:
- Default transactional assignment – Individual assignments directly to Profit Centre and segment rollup.
- Validations and Substitutions – Typically a piece of targeted code that is triggered when saving a finance document.
- Specific hooks to add custom code to modify individual postings (BAPI & User Exit) – Typically a targeted piece of code that is provided by SAP. As an example, foreign currency postings in SAP would not be captured by user exit due to the method of entry, there SAP provides us with a stub for code to be placed into (FAGL_3KEH_DEFPRCTR) where we can add code to determine which profit center should be used.
With the new S/4HANA functionality, complete segment, and profit center, improving financial reporting should be an objective within any S/4HANA implementation or upgrade.
Tenthpin is here to assist in the transformation process. Please do not hesitate to contact us if you wish to discuss this further.
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