Purchase Ordre Deferrals in S/4HANA - Part 1

[RameshPapanna11]

This blog covers Deferrals Management in SAP S/4HANA, aimed at business users, consultants, and anyone interested.

I have divided the complete article into two blogs.

Part 1 – Introduction, Key Points, Features of Purchase order deferrals, Benefits of the Solutions, S/4 Purchase Order Deferrals – Purchasing Scenarios and Use Cases.

Part 2 – Customizing, System Demo, Accounting posting logic and Reporting.

Introduction:

Deferrals: Deferrals is an amount deferred or delayed recognizing revenues or expenses on the income statement in a future period or multiple periods.

Deferred Revenue: It is a balance sheet liability where invoice/cash has received but goods/service not to be delivered until later periods. When the revenue is earned, it will move from balance sheet account to revenue on income statement.

Deferred Expenses: It is an asset invoice/payment has been made but goods/service is expected in the future periods. When the expenses are consumed, it will move from the balance sheet account to expenses on income statement.

Deferrals and Accruals: Both deferrals and accruals postings are for recording revenues or expenses so the proper reporting periods. Accruals and for revenues or expenses that have already occurred, but cash/incoming invoices are not received, or payment/vendor invoices are not made. Deferrals are for cash/incoming invoices that are already received, or payment/vendor invoices are already made but goods/service have not been provided.

Purchase Order Deferrals

Purchase order Deferrals is deferred expenses relevant to the procurement process. That is for service or consumable products purchase order, calculating and posting deferred expenses when early invoice or early services/products receipt is received. Since S/4HANA 1809, Component Purchase Order Accruals of S/4 Accruals Management, could automate only the accrued expenses process. As of S/4HANA 2021 it could also automate the deferred expenses calculation and do the posting.

The Accrual Engine is a component within SAP S/4HANA designed to streamline and automate the process of managing accruals. Here are some key points about how it works:

1. Data Transfer: Data from various components, such as Materials Management, is automatically transferred to the Accrual Engine. This data includes purchase order items that need to be converted into accrual items.
2. Calculation: The Accrual Engine uses this data to calculate the deferral amounts for each item. This ensures that the financial records accurately reflect the expenses and revenues over the appropriate periods.
3. Simulations: The system allows for simulations of deferral amounts. This feature helps in forecasting and planning by providing a preview of the financial impact before actual posting.
4. Periodic Runs: Periodically, an accrual or deferral run can be initiated. This process posts all the calculated deferrals for the relevant business transactions, ensuring that the financial statements are up to date.
5. Integration: The Accrual Engine is fully integrated into the General Ledger, supporting all currencies and fiscal year variants. It eliminates the need for separate journal entries and ensures that all postings are stored as line items in the Universal Journal.
6. Review and Approval: The Accrual Engine includes features for reviewing and approving accruals, ensuring that all postings are accurate and authorized before they are finalized.

These features make the Accrual Engine a powerful tool for managing financial accruals/deferral efficiently and accurately.

Features of Purchase Order Deferrals

• Purchase Order Deferrals is a part of Component Purchase Order Accruals in S/4 Accruals Management.
• Realtime replicating Purchase Order as accrual objects. You should choose the transfer variant with deferral item type assigned.
• Automatically calculated deferred expenses based on calculation methods.
• Provide multiple matching principles (calculation methods) for matching deferred expenses to expenses on income statement for reporting periods.
• Automatically post journal entries with account determination.
• Provide multiple reports.

Benefits of the Solutions

• Automate the entire process for deferred expenses calculation and posting.
• Reduce manual efforts.
• Increase data accuracy.
• Provide better business control.
• Accurate financial statements.

S/4 Purchase Order Deferrals – Purchasing Scenarios

Lean Service with 2-way Match

• It is a service purchasing without a service entry receipt. Purchase Order item is created with:
• Product Type: Group 2 Service
• Start of Life and End of Life maintained.
• Indicator Goods Receipt: No

Lean Service with 3 Way Match

• It is a service purchasing with a service entry receipt. Purchase Order is created with:
• Product Type: Group 2 Service
• Start of Life and End of life maintained.
• Indicator Goods Receipt: Yes

Enhanced Limit with 2 Way Match

• It is an enhanced limited ser vice purchasing without any service entry sheets receipts. Invoices are posted in an advance.
• Purchase Order item is created with:
• Item Category: E
• Product Type: Group 2 Service
• Start of Life and End of Life maintained.
• Indicator Goods Receipt: No

Enhanced Limit with 3 Way Match

• It is an enhanced limited service purchasing with a service entry sheets receipt. And Service entry sheet is posted in an advance.
• Purchase Order item is created with:
• Item Category: E
• Product Type: Group 2 Service
• Start of Life and End of Life maintained.
• Indicator Goods Receipt: Yes

Consumable Products with Non-Validated Goods Receipt

• It is a consumable product purchasing with non-valuated goods receipts. Invoices are posted in an advance before products receipted.
• Purchase Order item is created with:
• Product Type: Group 1
• Start of Life and End of Life maintained.
• Indicator Goods Receipt and Non-Valuated Goods Receipt: Yes

Consumables Products with Valuated Goods Receipt

• It is a consumable product purchasing with valuated goods receipts and goods are received earlier.
• Purchase Order item is created with:
• Product Type: Group 1
• Delivery scheduled maintained.
• Indicator Goods Receipt: Yes
• Indicator Non-Valuated Goods Receipt: No

Service Purchasing

• It is a service purchasing with purchase order item category D with service receipts and service are posted in an advance.

Use Case – Purchase Order Deferral

Deferrals Opening Postings:

Deferrals opening postings defer expenses as assets on the balance sheet. Deferrals opening could happen when prepaid/advance invoices or early goods receipts are posted. Every single prepaid/advance invoice or early goods receipt has its own deferrals opening posting.

Example: Insurance service purchasing of year 2022, invoice of the whole year was posted on Jan with 12000 EUR, deferrals opening postings should be done in Jan 2022.

Dr Deferral Expenses 12000

Cr Expenses 12000

Deferrals Periodic Postings

Deferrals periodic postings are posting of distributing/moving deferred expenses to the expenses on Income statement. Deferrals periodic postings are dependent on the assigned calculation method (matching principle). Every single prepaid/advance invoice or early goods receipt has its own deferrals periodic posting.

Example: Insurance service purchase of year 2022, invoice of the whole year was posted on Jan with 12000 EUR. The deferred expenses were distributed linearly over year 2022. Deferrals 4periodic postings for each period from Jan to Dec should be done.

Dr Expenses 1000 EUR

Cr Deferred Expenses 1000 EUR

Deferrals Release Posting

• If an accrual object is suspended the remaining deferrals are releases
• Example: Insurance service purchasing of year 2022, invoice of the whole year was posted on Jan with 12000 EUR. The deferrals opening posting with 12000 EUR was done and recognized 1000 EUR every period. If the accruals object is suspended on 30th June 2022 deferrals release postings with 6000 EUR would have been done

01st Jan Prepaid Invoice 12000 EUR

31st Jan Post Deferrals 12000 EUR

Jan to Dec Move Deferred Expenses to Expenses on Income Statement

	Expenses A/C		Deferral Account		Account Payable
Jan	12000							12000
Jan IP		12000		12000
Jan PP	1000				1000
Feb	1000				1000
Mar	1000				1000
Apr	1000				1000
May	1000				1000
Jun	1000				1000
Jul	1000				1000
Aug	1000				1000
Sep	1000				1000
Oct	1000				1000
Nov	1000				1000
Dec	1000				1000

I hope you enjoyed this article. Please feel free to share your inputs/suggestion/corrections in the comments sections.

Cheers

Ramesh Papanna