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Parallel Accounting and Universal Parallel Accounting in SAP S4 HANA Finance
Vol. 1 Parallel Accounting
What is Parallel Accounting?
There are different accounting standards that ensure accuracy and transparency for the organization. It allows fundamental frameworks, policies, and rules to report the financial transaction.
While business operates into a broader scope in terms of geopolitical phenomena, it requires or has an organizational mandate to follow compliance in the global as well as regional environment in terms of attending accountability and reporting transparency. Moreover, legal compliance creates a crucial role to accord with more than one accounting standard. Here parallel accounting comes into play to comply with transparency, regional competency, and accountability into the reporting standard.
Parallel accounting is one of the crucial subsets of Universal Journal that allows multidimensional reporting and allows integrated financial data reporting in a single chart of accounts.
Parallel accounting enables maintaining multiple accounting standards, like US GAAP and IFRS, based on business requirements and compliance mandates. It allows organizations to propose the financial report on different accounting standards and financial statement versions that cater to different regulatory requirements, industry standards, and internal reporting needs.
Why Parallel Accounting?
Financial reporting is crucial to organizational transparency and accountability. Moreover, it reflects financial performances to the external and internal stakeholders. Hence, maintaining relevant accounting standards for financial reports is crucial to ensuring financial accountability across the globe.
Now it is very important to accommodate or enable parallel accounting into SAP that complies with complex characteristics of financial components. Let’s take an example of incurring research and development expenses for innovation. According to the US GAAP, research and development expenses are treated as operating expenses that would reflect into the P/L statement as expenses. On the other hand, IFRS considers research and development expenses as assets that would come under the asset side on the balance sheet. Now the question is how to report the financial statement for “Research and Development,” while organizations need to comply with both US GAAP and IFRS. Here, parallel accounting enables the solution for the above question. It designed the functionality of the recording; the transaction has different characteristics based upon different accounting standards.
Scope of Parallel Accounting
The scope of parallel accounting is wide and has been applied to the different application components. Below are the key application components where parallel accounting plays a crucial role.
- · General Ledger Accounting
Based on the business requirement, parallel accounting allows regrouping and sorting of receivables and payables for different accounting principles. Parallel accounting also enables dynamic value adjustments for doubtful receivables. Moreover, parallel accounting intervenes in foreign currency valuation and allows posting for adjusted values of transactions posted in foreign currency.
- · Asset accounting
SAP allows to define different depreciation areas based on the different accounting principles. By assigning types of valuation or accounting principles to depreciation areas, SAP allows the integration between parallel valuations based on different accounting principles in asset accounting. There are two different ways to integrate asset accounting with parallel valuation; one is the ledger approach, and the other is the account approach. In the ledger approach, accounting principles are assigned to separate ledgers, which allows for the posting of separate documents for each accounting principle or valuation. In the account approach, different accounts are being created that represent different valuations for asset accounting. Likewise, in the ledger approach, separate documents are posted for each accounting principle or valuation.
- · Treasury and Risk Management
There is a strong integration of parallel accounting with Treasury and risk management. In Treasury and Risk Management, systems allow to post accounting entries in different valuation areas in accordance with different accounting principles. Here, valuation areas portray distinct accounting principles. Valuation areas are assigned with accounting principles and allow to post values to different accounting principles.
Valuation areas offer different classification categories that can be used for valuation specifications for each accounting principle. Below are the classification categories used in Treasury and Risk Management.
Valuation classes allow to distinguish financial assets as per the holding categories, such as availability for sales or held-to-maturity for the IFRS statement. As assets are assigned to different valuation classes, financial transactions can be posted on the specific accounts based on the nature and characteristics of the transaction.
Differentiation helps to define the structure of the balance sheet accounts by using characteristics upon them.
Single-position management proposes the concept of lot accounting based on which different consumption sequence procedures can be applied for specific financial products.
Position management procedures enable control over balance sheet accounts with three key parameters: valuation classes, valuation areas, and other characteristics.
- · Parallel Accounting in Controlling
In Controlling, multiple valuation approaches can be displayed in accordance with different valuation accounting principles used in the business vertical. The system enables features to use parallel accounting by using additional accounts. Based on the present scenarios, businesses will decide the accounting principles used for controlling and, moreover, need to create cost elements and revenue elements for accounting principles. Position Management Procedures, a feature, enable prescribed valuation approaches that can be assigned to balance sheet accounts based on valuation areas, valuation class, and other relevant characteristics.
Benefits of Parallel Accounting
- Enable multidimensional reporting and integrated financial data processing: Parallel accounting is one of the crucial subsets of Universal Journal that allows multidimensional reporting and allows integrated financial data reporting in a single chart of accounts.
- Allows different financial statement versions: It allows organizations to propose the financial report on different accounting standards and financial statement versions that cater to different regulatory requirements, industry standards, and internal reporting needs. Moreover,
- Parallel accounting and currencies: Parallel accounting enables using one local currency and an additional two parallel currencies to represent distinct valuations based on the currency. In a simple word, SAP allows 3 multi-dimensional currencies for each accounting principle. With multi-currency capabilities, businesses can process their valuation and key closing operations.
- Provides consolidated views and alternative fiscal year variant approaches: Parallel accounting offers increased data transparency and real-time analytics through consolidated views that help in potential decision-making. Moreover, parallel accounting offers alternative fiscal year variant reports that provide comprehensive analytics and insights.
- Removal of data redundancy: Parallel accounting enables diagnosed, effective, and sustainable reporting procedures that reduce data duplication and redundancy.
Approaches in SAP
There are two ways to maintain parallel accounting in SAP: the accounting approach and the ledger approach.
- Accounting Approach:
In the accounting approach, each general ledger account with the distinct characteristics gets created and aligned with responsible financial statement versions. Each chart of accounts is created based on accounting principles, and any number of financial statement versions can be assigned per chart of accounts. So, the account approach ecosystem contains different general ledger accounts, like adjustments accounts with different financial statement versions, and only one ledger. Separate documents are getting posted on each valuation or accounting principle.
Figure 1: Object flows in Accounting Approach
- Ledger Approach:
In the ledger approach, a separate ledger is being created in accordance with separate accounting principles (GAAP and IFRS). With this ledger approach, accounting entries should be posted to the specific ledger according to the nature of the transaction. However, accounting entries are getting posted into two ledgers at a single time, whether there are no specifications or indications of ledgers to be used. In the ledger approach ecosystem, there are only single financial versions with different ledgers. However, there is no requirement of creating adjustment accounts.
Figure 2: Object flows in Ledger approach
- Leading Ledger
Leading ledger is the default ledger that is assigned to all company codes and acts as a global ledger. In SAP S4 HANA, the leading ledger is referred to as 0L.
- Non-Leading Ledger
Non-leading can be referred to as a parallel ledger that represents the local accounting principles being used for reporting purposes. In SAP S4 HANA, non-leading ledger is marked as 2L.
Vol 2: Universal Parallel Accounting
Release
This concept is introduced in SAP S/4HANA Cloud, public edition 2105 release, and delivered to SAP S/4HANA 2022 and SAP S/4HANA Cloud, private edition customers in October 2022.
Background
Universal Parallel Accounting proposed a harmonized reporting architecture for ledgers and currencies that makes period-end reporting simpler and reduces complexity across the entire company accounting landscape. It enables parallel management valuations represented by additional currency types to distinguish a legal valuation from a group valuation.
There are some key challenges in traditional parallel accounting that lead to additional period-end closing activities, cumbersome filtering of values in reporting, and complex configuration. Universal Parallel Accounting (UPA) revokes those challenges and offers a synchronized and harmonized architecture for reporting and analytics.
Features and benefits of Universal Parallel Accounting (UPA)
UPA has played a pivotal role in group valuation and multi-currency reporting. This section will demonstrate the key features and benefits from UPA that businesses can achieve in terms of smooth business operation and financial reporting. With unconsolidated views, Universal Parallel Accounting allows valuation of material based on different ledger prices and asserts production variances and contribution margins for each ledger. Alternative Fiscal Years allows multi-fiscal year capabilities per ledger and/or company code to overcome the boundaries of fiscal year variant complexities and additional period-end activities. Multicurrency capabilities support up to ten currencies to calculate and post in parallel. Moreover, parallel accounting supports settlement per ledger and introduces the concept of ledger-specific settlement rules. In addition to this, UPA supports group valuation with consolidated views approaches, which eliminate inter-company revenues and COGS.
UPA in inventory valuation
UPA proposes an extensive segmentation approach to inventory valuation in terms of ledger-specific valuation, which allows more granular representation of different accounting standards for standard costs, work-in-process, finished goods inventories, and actual cost of goods sold. UPA introduces the value approach with settlement per ledger, actual costing runs per ledger, and inventory price per ledger. An audit trail for standard and actual costing can be executed with enhanced transparency and accuracy.
UPA in Asset Accounting
Universal parallel accounting enables settlement runs for AuC to final asset per ledger, which leads to monitoring and tracking of the complete asset life cycle picture per ledger basis. It also helps to assert actual asset values per accounting standard at the ledger level.
UPA in Overhead accounting
Previously, in General Ledger Accounting only the values in the leading ledger were transferred to Controlling that leads resulting in balances being left on the project in any additional valuations (ledger 2L, here) and an incorrect value on the receiver in the second ledger. With Universal Parallel Accounting, SAP introduces a pure ledger approach where the two sets of values are handled completely independently and the values on the project are cleared properly and the assets under construction are capitalized correctly in each ledger
Conclusion
Parallel Accounting is an enabling capability to perform valuations and closing preparations according to the accounting principles. This key enabler provides a comparative data reporting architecture that can either be based on dedicated ledgers or dedicated general ledger accounts within one ledger.
SAP ERP add-on for financial accounting and operations SAP S/4HANA Finance SAP S/4HANA Cloud Public Edition Finance SAP Asset Strategy and Performance Management FIN Cost Object Controlling FIN Accounts Receivable and Payable FIN Controlling FIN Cost Object Controlling SAP Revenue Accounting and Reporting FIN Asset Accounting FIN Treasury SAP Treasury and Risk Management Treasury Management SAP S/4HANA Cloud Public Edition Asset Management SAP Contract Accounts Receivable and Payable SAP S/4HANA Finance for group reporting SAP Group Reporting Data Collection SD (Sales and Distribution) FIN Material Ledger MM (Materials Management) SAP S/4HANA Cloud Public Edition Sourcing and Procurement SAP S/4HANA Cloud Public Edition Finance SAP Receivables Manager
@DataTherapist, @Laura Schmitz @Christoph Christophersen