As already mentioned in the previous blog posts related to active budget control the available budget will be computed by ‘released budget YTP – (actuals + encumbrances)’. To my opinion, the activation of purchase order encumbrances is a mandatory prerequisite to perform any meaningful budget check.
In this blog post about purchase order encumbrances I will cover:
How to activate the capability of encumbrances?
Highlight the increase / decrease of encumbrances
The need to assure final delivery to assure clearance of encumbrances
Where to report encumbrances in detail?
Ideas how to deal with encumbrances, that do not carry the budget category because they were created prior to budget check activation
The need for encumbrance carry forward run at year end
Scoping and fine-tuning activity for encumbrances
First you need to activate financial forecast in scoping.
Scoping Option - Financial Forecast for Procurement
In a second step two fine tuning activities must be checked and maintained:
Fine Tuning Activities- Financial Forecast
and following option will be available.
Fine Tuning Activities - Financial Forecast Details
The posting scheme ‘E1- Purchase Order’ is pre-delivered and must be used! Please assure that the necessary account determinations are assigned. Otherwise the purchase order release will not be correctly processed in financials.
Posting Scheme E1 - Purchase Order
And please assure that it is marked as forecasting relevant.
Posting Scheme - Flag as Forecast Relevant
Purchase order encumbrance – some details
“Why should we be doing all the settings shown previously?” you might ask yourself. Let’s take an example having a look at the purchase order 145. I have created a purchase order 145 with two items and financial forecasting switched on.
Purchase Order 145 with two Items
In this small example item 1 and item 2 have a variation in the expected follow up documents. This has implications which transactions impact the overhead cost ledger. Thus the assigned cost center, the cost collector project or direct cost project.
Goods and Service Receipt Expected
Both items have been delivered and/or invoiced. Please note in the 'source document type' column which transaction altered the encumbrances.
Report: Encumbrance - Line Items (for Purchase Order 145)
Increase and decrease of encumbrances
The encumbrance date is the date in which a change to the encumbrance is posted. Examples are:
Creation of a purchase order item, goods receipt, service acknowledgement, cancellation of a purchase order item
Posting date in the report ‘Encumbrance – Line Item’
The posting date can be interpreted as the ‘anticipated’ posting date of the future actual posting. In this example it is derived from the delivery date in the purchase order.
Increase of encumbrances
These examples illustrate which transactions or changes lead to an increase or creation of encumbrances
Release of purchase order
Additional purchase order items to a released purchase order
Increase of ordered quantity / increase of price
Reopen a cancelled item for delivery
Encumbrances are only created when a purchase order is ordered (not when it is saved).
Decrease of encumbrances
These examples illustrate which transactions or changes lead to a decrease or cancellation of encumbrances:
Goods or service acknowledgement
Reduction order quantity or price
Purchase order cancellation
Final delivery confirmation of a purchase order item
Cancellation of an ordered item or entire purchase order
Please note that the increases and decreases of encumbrance always refer to the original ‘anticipated’ posting date of the encumbrances. The encumbrance date is the date of the changing event itself. Do not mix it up with the posting date in the journal entry for example for the supplier invoice or the goods receipt.
Crucial and critical: final delivery / finished purchase order
It is crucial to apply practices that assure purchase order items are properly set to ‘finally delivered’ or finished. In many running systems we have seen that many customers do have NOT such control in place, yet. If encumbrances are switched on, these encumbrances will never be fully cancelled out. This in combination with active budget check switched on might lead to a more and more creeping up consumed budgets by not properly closed and not fully completed purchase orders.
Encumbrances in reporting
Following main reports, I would like to highlight:
Cost Centers – Budget Monitoring
Projects – Budget Monitoring
Encumbrance - Line Items
If active budget control is switched on also the new encumbrances after that date will have the budget category populated.
Encumbrance balance carry forward - at fiscal year end
Why is and encumbrance balance carry forward required?
Envision a scenario at fiscal year end. Some purchase orders are not (completely) delivered, fulfilled or invoiced yet. Encumbrances were accounted for this fiscal year. The expected delivery or fulfillment in the upcoming fiscal year will consume budget of next year. Therefore, the encumbrance carry forward run should be incorporated into your year-end closing procedure to assure that these encumbrances or forwarded to the next fiscal year.
In essence the encumbrance carry forward will:
Take all openencumbrance balances of the to be closed fiscal year into account
Cancel the encumbrance in the year to be closed
Create new encumbrance lines with following dates (the carry forward)
The lines will affect last date of fiscal year and first date of new fiscal year.example purchase order item 4711/1 has open encumbrances 10 ea 100,- EUR at year end of 2021 and fiscal year equals calendar year.
4711/1 -10 ea -100,00 EUR encumbrance date 31.12.2021
4711/1 10 ea 100,00 EUR encumbrance date 01.01.2022
The encumbrance balance carry forward is part of the general ledger work center in the section of periodic activities as part of the closing activities.
Special topic - which dates for encumbrances are used?
If you have a look in more detail to the report ‘Encumbrance – Line Items’ you will note the availability of 2 specific and important dates in the data model per line:
What do these dates mean and how are they derived?
Ad 1. Encumbrance date – this is the date in which an encumbrance has been created, increased, or changed. These dates and respectively derived accounting periods will be used in the budget check calculation
Ad 2. Posting date – this date is derived from the anticipated delivery date in the purchase order and anticipates the (future) actuals to affect the budget. This key date and the derived fiscal periods is more suitable in a periodic plan / actual / forecast reporting because it puts the encumbrance to the expected period where it is most likely to become actuals.
The following example illustrates in a simplified manner the behavior after purchase order creation.
The dark orange represent the Encumbrance Date. The bright yellow brown represents the (anticipated) posting date.
Example: Difference Encumbrance Date and Posting Date
Special topic: using encumbrance before activation of active budget control
This paragraph is relevant in the context how to phase in the active budget check. In case the customer activates financial forecast with encumbrances after active budget check is scoped this paragraph is irrelevant.
If the customer has been using encumbrance before activation of active budget control it must be noticed that all encumbrances prior activation of active budget control lack the information of budget category.
Please also check the blog post about guidance for introducing the scenario in a running system: Active Budget Control in SAP Business ByDesign – Scenario Introduction Guidance
In this blog post I walked you through the necessity to switch on encumbrances for the purpose of a meaningful active budget control. The required scoping and finetuning was shown as well as the key elements how increase and decrease encumbrances are affected by related transactions. It is crucial that customers also have enforced proper and timely closure of purchase orders. As a special topic the year end handling of encumbrances and potential carry forward were briefly discussed. And finally, also the usage in reports as well as the usage in budget check where explained.