What Are the Financial Reporting Structures in SAP S/4HANA Finance?

With the bringing together of the controlling and management accounting applications in the Universal Journal, the functionalities of general ledger accounting are available in controlling (and vice versa).

Knowing this, let’s discuss the accounting entities that are important for accounting and controlling reporting in SAP S/4HANA.

First, let’s look at the ledger, which enables parallel valuations for a company code. We can also use this in controlling by showing a parallel value flow based on different valuations—for example, for depreciation or revenue recognition. Both are dependent on the underlying accounting principle. And then we have an innovation: the extension ledger enables you to enter different and additional costs based on the Universal Journal structure, and it contains commitments.

Universal parallel accounting in SAP S/4HANA takes the idea of the ledger a step further. There is now the option to activate and use the ledger not just in financial accounting but also in asset accounting, controlling, and the material ledger. There are two fundamentally different types of parallel accounting:

• With multiple legal valuations, you work with multiple legal accounting approaches in the same company code to meet the requirements of global and local accounting principles, with each accounting approach stored in a separate ledger.
• With multiple management valuations, you look at different views of intercompany and intracompany trading. You can use group valuation to carry an "at cost" view of an intercompany business transaction in addition to the legal markup in the legal view and/or profit center valuation. You do this to define transfer prices between profit centers, either at a divisional level or at the plant level. These management views are also stored in separate ledgers.

Next, we come to currencies. Based on the Universal Journal, you now have a set of parallel currencies in every single journal entry, which is identical by design in the general ledger and controlling. The handling of currencies changes with the introduction of universal parallel accounting. It allows you to store up to ten different currencies per ledger, so that in addition to the group and local currency, you might capture a functional currency and whatever additional currencies are needed in the company code (such as an index currency in a high-inflation currency). Alternatively, you can create a custom currency so that you can use exchange rates that are different from those used for currency type 10.

Another important reporting attribute is of course the general ledger account. It controls the postings and serves as the basis for reporting, in particular, for contribution margin reporting.

Ledger

In general ledger accounting, the ledger is the entity via which all business transactions are recorded and in which all general ledger accounts are systematically kept. Based on the ledger, you get your financial statement. You can manage several parallel general ledgers—for example, to be able to get financial statements according to different accounting principles, like local Generally Accepted Accounting Principles (GAAP) and then International Financial Reporting Standards (IFRS) as the common accounting principle.

The ledgers and their parameters per company code are defined in the following Customizing menu path: Financial Accounting > Financial Accounting Global Settings > Ledgers > Ledger > Define Settings for Ledgers and Currency Types (or Transaction FINSC_LEDGER). You’ll arrive at the screen shown below.

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There are two ledger types, which we’ll discuss next: the standard ledger and the extension ledger.

Standard Ledger

The standard ledger is relevant for general ledger reporting. The figure above shows three parallel ledgers: 0L, 2L, and 3L. There is always exactly one ledger marked as leading (with a checkmark in the Leading column). In our example, Ledger 0L is the leading ledger.

The postings in the leading ledger are regarded as primary and are the default for postings in other ledgers if there is no own/different valuation in this ledger. All company codes are assigned to this leading ledger per default. Especially the logistic applications rely on the leading ledger—for example, when they read actual costs for a cost object like a project to calculate a percentage of completion (PoC) or if the customer billing is based on the expense postings to the customer project.

Further parameters are defined in the same IMG activity. You mark a ledger—0L in this example—then select Company Code Settings for the Ledger, then double-click company code 1010. You’ll arrive at the screen shown here.

Here you can specify the following:

Fiscal Year Variant

A restriction to know when specifying the fiscal year variant: For a cross-company-code controlling area assignment, it must be equal in all assigned company codes.

Pstng Period Variant

This describes the posting period (e.g., the beginning and end dates of the period).

Accounting Principle

The accounting principle can be assigned on the ledger level or on the ledger company code level. If you maintain it generally on the ledger level, you need not maintain it here.

Functional Currency

You also can define several currencies, which are stored in parallel in the Universal Journal.

When you create a ledger, the system automatically creates a ledger group with the same name. To simplify work for general ledger accounting processes, you can group standard ledgers together in a ledger group. With this ledger group, you can enter one manual journal entry and it will be posted in all assigned ledgers at the same time in parallel.

Learn how to define ledger groups in SAP S/4HANA here.

With the accounting principle, you control the valuation in several financial applications— for example, foreign currency valuation, asset deprecations, WIP, and revenue recognition.

You can display the accounting principle by following IMG menu path Financial Accounting > Financial Accounting Global Settings > Ledgers > Parallel Accounting > Define Accounting Principle. You’ll arrive at the screen shown in the following figure.

If you have common accounting principle such as US-GAAP or IFRS, you can use it for every posting by assigning it directly to a ledger. (See the assignment of IFRS to Ledger 2L earlier.) However, you don’t need a ledger for every accounting principle that you support. You can meet the financial reporting needs of your local subsidiaries by assigning the accounting principle to the combination of company code and ledger. (See the assignment of German local GAAP DEAP to Company Code 1010 and Ledger 0L earlier.)

If you work with universal parallel accounting, you can potentially work with two additional standard ledgers: one for group valuation and another for profit center valuation. Understand that universal parallel accounting works with single valuation ledgers, in which each ledger has a dedicated purpose (accounting according to a group GAAP, accounting according to a local GAAP, group valuation, or profit center valuation). Looking back at the first figure in this post, you can see the Valuation View column, where Ledger 0L and Ledger 2L represent different types of legal valuation but GV is used for Group Valuation, the purpose of which is to deliver an “at cost” view of intercompany business. For the physical goods-driven process, the group ledger functionality eliminates the impact of intercompany trading by creating additional journal entries that remove the intercompany revenues and COGS to a group valuation clearing account.

Before universal parallel accounting, the approach to group and/or profit center  valuation was to use the leading ledger as a multiple valuation ledger, in which the group and profit center values were stored alongside the legal values in ledger 0L. In this case, the Valuation View field is blank and hence supports multiple valuation approaches in a single ledger.

Extension Ledger

Next to the standard ledger in SAP S/4HANA, there is now a new type of ledger available: the extension ledger. It covers management accounting requirements.

When you work with the Universal Journal, the postings for controlling and legal reporting are both stored in the general ledger. On the one hand this is, as already mentioned, a big advantage because there’s no reconciliation needed. On the other hand, for some business processes you want to apply different figures or additional information in your internal controlling view. For this, you have the extension ledger.

Here you can enter controlling-specific journal entries in addition to the legal bookkeeping: other costs or additional costs. These journal entries are only relevant for cost accounting reporting; they do not influence the legal reporting, which is exclusively based on the standard ledger.

While the standard ledger contains the different journal entries for all business transactions, the extension ledger contains management-relevant journal entries only. The extension ledger only stores the delta entries that are posted specifically to the extension ledger. This setup assumes that all postings in the underlying standard ledger are part of the extension ledger reporting, thus avoiding redundant data storage.

Learn how to create an extension ledger here.

For every extension ledger, you need to assign a standard ledger. For example, in the first figure shown previously, ledger 0C is assigned to standard ledger 0L, or to another extension ledger, and ledger 0E is assigned to extension ledger 0C. The extension ledger setup in our example is visualized here.

When you run a report for an extension ledger, the journal entries of the extension ledger and the underlying standard ledger are always displayed together. So when you run a report for ledger 0E, you get a report with the commitments posted in ledger 0E and the actuals as an aggregation of the management adjustments in ledger 0C, plus all the journal entries posted in the legal ledger 0L.

There are several controlling purposes covered with the extension ledger.

Provisioning of Controlling Reporting

For your internal controlling reporting, you want to apply different values or enhanced cost component information:

• First you can post delta values in the extension ledger to adjust the costs or margins for specific management objects. An example could be to transfer revenues between profit centers or to add costs to a cost center.
• You want to include statistical sales conditions in a sales scenario in your contribution margin reporting.
• You use for these use cases an extension ledger of type Management Accounting—in our example, ledger 0C.

Commitments

If you activate commitments, they are now persisted in an extension ledger of type Commitment/Prediction—in our example, ledger 0E. Commitments are triggered when a purchase order or a purchase requisition is created.

Prediction

With predictive accounting, you want to enable the prediction of future financial data based on available operative documents already in the system, like sales orders or purchase orders. For example, for a sales order prediction you might create the journal entries for the goods issue and billing expected in the future in the prediction ledger of type Commitment/Prediction (ledger 0E here).

Extension Ledgers and the Universal Journal

With the extension ledger, you continue following the approach that all documents are stored in the Universal Journal and thus have the same fields and structures. With this, comparability and transparency are ensured because prediction and commitment documents have the same structure as the actual values.

The same is true for management adjustment postings, which are posted as deltas to the legal postings in the underlying standard ledger.

Currencies

In financial accounting, in addition to the transaction currency, the local currency (the company code currency) and the group currency (defined by controlling area) is calculated by default for every journal entry. There are eight freely definable currencies also available.

For an example of what this looks like for a company code, see the next figure. The local currency, derived from the country, Germany, is defined as euros. The global currency, USD, is derived from the controlling area because in this example the organization has its headquarters in the US.

You can check the currency setup for all processes and functions in financial accounting in Customizing by following menu path Financial Accounting > Financial Accounting Global Settings > Ledgers > Ledger > Define Settings for Ledgers and Currency Types. Then select Company Code Settings for the Ledger in the dialog structure. You’ll arrive at the screen shown in the figure above.

With the integration of controlling and financial accounting in the Universal Journal, the currency setup is the same for all postings and thus available for controlling too. This means that if you purchase goods in a local currency, you’ll see the same document in the transaction currency, local currency, group currency, and any other currencies entered on the screen shown above, and the conversion will be made at the time of posting.

The currency options are further enhanced with the introduction of universal parallel accounting. In the previous figure, we see five additional (FreeDef) currencies being used alongside local currency type 10 and global currency type 30. Before the advent of universal parallel accounting, any journal entry would be captured in transaction currency and then converted into the various currencies in the ledger settings. However, with universal parallel accounting, these currencies are available throughout asset accounting, controlling, and the material ledger.

With SAP S/4HANA 1909, SAP introduced the functional currency field. This isn’t a new currency as such, but it allows you to define the role of an existing currency to make reporting easier. The default is that the functional currency is the same as the local currency (currency type 10), but in a country such as Switzerland, which trades heavily with the countries in the eurozone, there may be a requirement to record transactions in euros alongside Swiss francs. Alternatively, in Mexico, which trades extensively with the United States, there may be a requirement to record transactions in US dollars alongside Mexican pesos.

In business terms, the functional currency is the currency of the primary economic environment in which the entity operates. In determining the functional currency, an entity will assess the indicators listed in the accounting standards. The main drivers for the choice of functional currency are as follows:

• The currency that mainly influences sales prices for goods and services, as well as the currency of the country whose competitive forces and regulations mainly determine the sales prices of the entity's goods and services.
• The currency that primarily influences labor, material, and other costs of providing those goods or services.

In the figure below, we’ve scrolled right in the company code settings to show the Functional Currency. It’s 10 in company codes 1010 and 101A; and it’s 40 in company codes 1210, 1510, 1710, and 2810. Notice the three FI Currency fields to the right of the Functional Currency field. These are the so-called BSEG currencies (taken from table BSEG, which stores accounts payable and accounts receivable information), and they are used to clear payments in accounts payable and accounts receivable. The functional currency must also be a BSEG currency, and if the material ledger is active, the functional currency must also be a material ledger currency. The functional currency can only be set in leading ledger 0L, and it is applied to the nonleading ledgers.

The next figure shows what this means for the material price of Material FG126. We are looking at the price in Ledger 0L in Company Code Currency (euros), but you can press (F4) to switch to Group Currency (US dollars) and Hard Currency (Swiss francs), plus two custom currencies (Z1 and Z2). We would also switch to the prices in ledger 2L or 4G.

Conclusion

The Universal Journal has revolutionized business financials by marrying together financial and management accounting processes. This post introduced you to the financial reporting structure in SAP S/4HANA Finance enabled by the Universal Journal.

Editor’s note: This post has been adapted from a section of the book Controlling with SAP S/4HANA: Business User Guide by Janet Salmon and Stefan Walz. Janet is the chief product owner for management accounting at SAP SE and has accompanied many developments to the controlling components of SAP ERP Financials as both a product and a solution manager. Stefan is the chief business process architect for SAP S/4HANA financials at SAP.