[S/4HANA Accruals Management] [Cloud version] Q1- What kind of Purchase Order Item is Accruals relevant?
Hello there! This series blogs about S/4HANA Cloud Accruals Management – Purchase Order Accruals, are created specially for you.
- Business users who would like to know the features and logic
- Functional Consultants who would like to know the features and logic , and in addition, design based on SSCUI capability
- Technical Consultants who would like to know the features and logic , and in addition, extend default logic by leverage the SAP Cloud BAdI capability
The world has seen increasing complexity in business. There are goods/service sold and consumed across time span consume across time span. To reflect an accurate snapshot of financial position, it is important to have a reliable and consistent rule of financial reporting. Consequently, it is important to accurately accrue for both revenue and expense at the end of the reporting period.
With a series of blogs, I plan to debrief the concepts and alongside, walk you through how SAP S/4HANA Accruals Management helps you automate the process. In addition, if there are special rules for a country/industry, these blogs might help you to understand the possible changes you could make within SAP S/4HANA Cloud.
I assume you all have basic understanding of ‘what is Accruals’ and ‘what is S/4HANA Accruals Management’. In case not, kindly check below rich resources before going into details.
· SAP Best Practice Scope Item: Purchase Order Accruals (2VB)
· SAP Best Practice Scope Item: Machine Learning for Accruals Management (3NF)
Highlights for a few common questions which has been raised tons of times.
1. Accruals vs Provisions
- Accruals: A liability, goods and services already delivered where the invoice wasn’t received.
- Provisions: A liability of uncertain timing or amount. (IAS 37: the likelihood of occurrence of this obligation higher than 50%).
The main differences from my point of view, is certainty of liability
For Accruals, it’s 100% certainty of liability. Because ‘we’ know that the supplier has rendered the service or delivered the goods. So, accruals are often reported as part of trade and other payables.
For Provisions, it is 50% ~ 100% certainty of liability. Because ‘we’ have to ‘puts a certain amount of money aside’ as preparation for the potential (>50% likelihood) consequence of an event in the past. So, provisions are reported separately.
If you want to understand in deeper level, I would recommend the IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets ‘, which is so far the best I learned to summarize the differences.
2. What S/4HANA Accruals Management and why it’s important?
With pure manual accruals posting, it is not easy to explain why certain amount is added for what kind of business transactions. Accrual posting becomes a headache for both accountants and audit. How to provide and prove this accrual posting?
With SAP S/4HANA Accruals Management, you could find every trace for purchase order accruals posting – WHEN, WHAT & WHY.
With the new application Purchase Order Accruals, it is possible to automatically calculate and post purchase order accruals. This new application is based on the (new) S/4HANA Accrual Engine which offers flexible configuration options for calculation and posting of the accruals.
Optional: A review process for the monthly accrual amounts can be activated in the Configuration.
3. Accruals vs S/4HANA Accruals Management
By definition in IFRS, accrual-based accounting means recording accounting transaction in the time period on which they occur – matching revenues against expenses when transactions. In short, there are accrued revenue and accrued expenses.
S/4HANA Accruals Management only focus on accrued expense. Accrued expense is a liability whose timing or amount is uncertain by virtue of the fact that an invoice has not yet been received.
o If you are looking for a solution to automate the accrued revenue, you could explore ‘Event-based Revenue Recognition’.
o Until CE2011 there is only purchase order accruals available in SAP S/4HANA Cloud. There will be more to come in the upcoming releases.
Q1 – What kind of Purchase Order Item is Accruals relevant?
When you purchase products that are directly used, or services that are received during a period of time, you need to accrue expense for that.
in S/4H4NA Accruals Management, Purchase Order Accruals will accrue expense for the purchase order item that meet all of below criteria.
1) To be invoiced
2) ‘In Process’
3) Expense occurs from consumption of goods or services
Let’s expand a bit of business scenarios and look into the system with default criteria. In later chapter, I will explain how you could influence the result.
First, what is purchase order item ‘To be invoiced’?
o Purchase orders item is not an inter-company stock transfer.
When the supplying plant is different from the receiving plan, it is an inter-company stock transfer. Because there’s no external supplier involved, the PO item is not relevant for accruals.
o Purchase order item is not ‘Return item’.
When the stock is in poor quality, or if there is excess stock, you will send back the goods to supplier. Speaking in system language, the goods to be returned are marked as ‘Return Item’ in the purchase order. There will be no invoice issue for this return item, thus the PO item is not relevant for accruals
Secondly, what is a ‘In Process’ purchase order item’?
o Purchase order is not archived and deleted from system.
You could find it in the Manage Purchase orders app. In case the workflow is activated for purchase order, the purchase order should be approved.
o The purchase order item is not ‘marked as deleted’
o The purchase order item which valuated by Goods Receipt is not marked as ‘Deliv.Compl.’
o The purchase order item is not marked as ‘Final invoice’.
Last, what is purchase order item with ‘expense occurs from consumption of goods or services’ ?
o Account assignment category ≠ <Blank>
This means, you put the purchased good on stock and plan selling to customers later.
Except for storage expense, no expense occurs. The PO item is not relevant for accruals.
o Account assignment category ≠ ‘U-unknown’
This means that you don’t know what kind of account assignment category to put for purchase order item.
It’s not clear where to put the potential expense. The PO item is not relevant for accruals
o ‘Account assignment category ≠ ’Q – Project: make-to-order’.
This means the purchased good is for mainly for inventory account to allocation cost for production.
No expense, the PO item is not relevant for accruals.
o *‘Account assignment category ≠ ‘A – Fixed Asset’
This means you are purchasing fixed asset. There will be depreciation postings later to recognize the cost.
No expense to be consumed, the PO item is not relevant for accruals.
Hope so far hope you have the answers about ‘What kind of Purchase Order Item is Accruals relevant’. If so, get yourself ready for next chapter.