The classic model of financial consolidation can’t help organizations if their business demands much faster access to group-wide decision-support information.
They can’t afford to wait for their data to be moved to a data warehouse, run through the various validation and transformation processes, and then consolidated. That’s why SAP set out to develop a new strategy for consolidation that combines the benefits and power of existing solutions into a single consolidation tool by working with a common data model.
The single consolidation tool needed to accomplish several things:
Create a Fully Unified Framework
As its work on consolidation progressed, SAP developed a consolidation process that placed the SAP Business Planning and Consolidation (SAP BPC) engine on top of the Universal Journal. In theory, this approach, known as Real-Time Consolidation, offered a group closing directly on the nonconsolidated entity information, meaning that the local close and group close was already based on a single source of truth.
However, because of the SAP BPC–specific user interface, Real-Time Consolidation didn’t bring a fully integrated experience to the end user; a fully unified framework for local and group-level reporting was still missing.
Cover the Entire Data Flow
It was critical that the solution differentiate between planned, actual, simulated, and predicted data, as well as varying reporting cycles. For this reason, tight integration with SAP Analytics Cloud would be key.
Connect Quantitative and Qualitative Data
For group-level reporting, both nonfinancial measures and notes and other qualitative data are as important as the numbers themselves. A new framework should support not only annotations but also communication between stakeholders when preparing group reports.
Be Deployable in the Cloud
Today, many organizations deploy a combination of on-premise and cloud applications as the source of their financial consolidation data. In the future, cloud-based consolidation may be the only preferred method, so a new solution should be deployable in the cloud or on premise to help organizations as they transition their IT and financial operations to the cloud.
SAP S/4HANA Group Reporting Development
To deliver a consolidation solution to customers that would meet these requirements, additional development was necessary.
With the introduction of SAP S/4HANA Finance, a centralized, transaction-level steering model—the Universal Journal—was created for customers. This means that if the different entities that need to be consolidated are running SAP S/4HANA, then all nonconsolidated financial data is available within this Universal Journal. (Of course, there might be situations in which not all entities are included in a single SAP S/4HANA instance.) So let’s assume that we have all nonconsolidated financials together. Rather than copying all data to a consolidation tool, why not bring the consolidation engine directly into the environment in which the source data already sits?
This is the idea behind the group reporting solution. As shown in the figure below, the group reporting solution sits in the same environment as local accounting—resulting in real-time access to the local data from within the consolidation solution. This allows for a direct interrogation of the source data. If the delivered data exceeds certain thresholds, a group accountant can immediately view the underlying data records to understand what has caused the problem.
Improvement 1: Data Quality
Let’s consider the impact of running legal and management consolidation integrated in SAP S/4HANA. The first big improvement centers on data quality. You don’t need to move or transform your data, which eliminates the risk of reconciliation issues. This architecture means that both entity close and group close can be based on shared master data in the form of accounts, cost centers, profit centers, and so on.
But it also means that when running local accounting and group accounting in a single environment, postings can be validated immediately on release to the group reporting solution because the validation rules (which are part of the consolidation engine) are immediately available. The same logic applies to other preparatory consolidation steps, like translation into group currency. The group reporting solution uses the figures for reporting dimensions captured in the Universal Journal, but it also has its own entities, such as consolidation units (used to structure the various business units for the purposes of elimination), consolidation groups (used to bring the consolidation units into a hierarchy), and financial statement items (used to group the accounts).
Improvement 2: Continuous Close
The second improvement relates to the realization of continuous close on the consolidated level. Being able to validate entries at the source means you can translate a financial posting into group currency at the time of the initial posting. The consequence is that time-consuming preparation tasks for consolidation no longer need to be executed as part of the group closing process. Therefore, group reporting supports the move toward continuous accounting.
The figure below shows what happens when the preparation steps for consolidation (data upload, currency translation, validation checks on the nonconsolidated figures, intercompany reconciliation) are executed in both a classic approach and the SAP S/4HANA integrated approach. As shown at the bottom of the figure, the group reporting solution moves tasks out of the period close so that only the genuine consolidation steps remain to be performed within the close. In the new workflow, because the data load is no longer needed and the currency translation is already complete, the only steps left to execute at period end are the intercompany elimination and specific consolidation calculations. Therefore, the time spent to run the consolidation process is significantly reduced.
In addition, time can be saved by performing data validations immediately to check the plausibility of the data from the subsidiaries. These might be simple checks such as whether the data for certain items exceeds a threshold compared with the previous period, or they can include more complex logic to determine whether the posting is allowed. The group reporting solution includes a new validation rules framework that makes it easy for non-expert users to set up rules and validate against these rules; this way, group accountants can be sure that they’re dealing with reliable financial data in the steps that follow.
Moreover, a consolidation run within a period becomes an option—at least when the relevant postings are available from the subsidiaries. Consequently, the principle of continuous accounting now also can be enlarged to include group financial figures as well. Do note that we don’t expect SAP to provide real-time legal consolidation because some of the underlying postings will be missing during a period, such as the revaluation of open receivables and payables. Instead, we expect SAP to work on providing a managerial view of the situation that gives detailed insight into the income statement by delivering divisional or group-level figures.
Improvement 3: Transparency
The third improvement is that this setup provides unprecedented transparency. Organizations can drill down from consolidation items to the document line items of the entity because all data is found back in the single source of financial information: the Universal Journal. This immediately builds trust in the user community that the figures are valid and allows users to reallocate their effort from manual checks to value-adding activities.
This all ties back into the overall view to run financial reporting directly from the SAP S/4HANA environment itself by making use of the embedded reporting capabilities: no matter whether you run an entity-level report in an SAP Fiori–based analytical application or run it on the divisional or group level, the way you report is exactly the same.
As you can see in the group balance sheet report in the first figure below and group cash flow statement in the second figure, embedded reporting capabilities are applied in the same way to deliver instant insights on the group level. The only difference is that the account hierarchy is based on financial statement items, rather than being in a flat list. Notice also how the local reporting dimensions are available for drill-down alongside the group reporting-specific consolidation units and consolidation groups in the left-hand Dimensions panel.
SAP BPC Functionality Ported to SAP S/4HANA Finance
One of SAP BPC’s strengths inherited by the group reporting solution is its rule-based reporting, which classifies individual reporting lines for embedded reporting. The setup of reporting lines is illustrated below, where you can see the link between the financial statement items and the reporting lines. This means that reports can be built dynamically for a relevant version and period, but the account structure and posting logic in the underlying data remain stable.
Linked to this, the so-called flow principle is inherited from the SAP Financial Consolidation solution. This concept is specifically used for balance sheet items, supporting the creation of a consolidated cash flow statement that takes into consideration the correct cash movements.
Notice the column SI Cat. (subitem category) in this context, which is used to identify the movements for the cash flow statement. These flows can be visualized in the Cash Flow Analyzer SAP Fiori app.
One of the key strengths of the SAP Enterprise Controlling Consolidation System (SAP EC-CS) and SAP Business Consolidation (SAP SEM-BCS) solutions was the accounting document principle, which means that each consolidation task results in an auditable consolidation posting. These consolidation postings cover the initial data load; automatic postings for interunit eliminations, investment eliminations, and so on; and manual postings for corrections. This is also how consolidation postings are added to the Universal Journal.
The application of this document principle is illustrated in the figure below, which shows an example of a reclassification item. Looking at the details, you can see the line items of each posting, including the item type that identifies the type of posting, the financial statement item posted to, and both the consolidation unit and partner.
The consolidation process itself is another area in which the group reporting solution leverages previous development. It uses two monitors that were previously used in the SAP EC-CS and SAP BCS solutions: the Data Monitor to track data collection and preparation tasks, and the Consolidation Monitor (shown below) to follow up on the consolidation steps themselves.
Note that the Consolidation Monitor is helpful for monitoring the group closing process, but the long-term goal is to have a single process follow-up in place for both local close and group close. This is where an evolution to the advanced financial closing solution comes into play.
Consolidation with group reporting is one key improvement SAP S/4HANA Finance has brought to SAP users over the legacy SAP ERP suite. In this blog, you took a look at three ways SAP S/4HANA Finance improves the consolidation process, and saw how existing SAP BPC processes integrate alongside these new ones.
Editor’s note: This post has been adapted from a section of the book SAP S/4HANA Finance: The Reference Guide to What’s New by Janet Salmon and Michel Haesendonckx.