Inventory Accounting with Universal Parallel Accounting in SAP S/4HANA 2022
Continuing the blog series on Universal Parallel Accounting, I will now look at the topic from the point of view of Inventory Accounting to explain the changes in Material Valuation, Product Cost Planning, Actual Costing and Balance Sheet Valuation. If you haven’t already read it, please refer to Sarah Roessler‘s excellent introduction to the topic: Universal Parallel Accounting in SAP S/4HANA.
Universal Parallel Accounting and Product Costing
Universal Parallel Accounting offers two types of parallel valuations for product costing: unconsolidated views (different legal valuations) and a consolidated view (group valuation) and it’s important to understand the difference (see Figure 1).
With the unconsolidated views the focus is on valuating materials differently depending on the requirements encapsulated in the corporate and local accounting principles. Normally there will be one common accounting principle (such as IFRS) used in all countries and many different accounting principles to reflect the requirements of the local GAAPs in the various countries, including a requirement for actual costing in some countries. You may already be familiar with this approach if you have worked with the business function “parallel cost of goods manufactured” (FIN_CO_COGM), but the new approach is more extensive in that it allows you to carry the same material with multiple legal prices and standard costs and thus to calculate production variances and contribution margins in each ledger, providing an end-to-end view of product profitability that can vary depending on the underlying accounting principle.
With the consolidated view the focus is on achieving a group view for intercompany value flows as distinct from the transfer prices used by the affiliated companies as they trade amongst one another at arm’s length. You may already know this approach as group valuation as distinct from legal valuation, but with Universal Parallel Accounting we introduce a consolidation-like approach in which the intercompany revenues and cost of goods sold (COGS) are eliminated in a separate ledger whenever an intercompany boundary is crossed within the group, such as when a manufacturing company sells to distribution center or the distribution center sells to the selling company who manages the business with the final customer. The “at cost” valuation continues to be supported for the valuation of intercompany goods movements, to ensure that profit in inventory is excluded in the group view. Note that profit center valuation is not yet available with Universal Parallel Accounting but is planned for OP2023.
Customers who used group and profit center valuation in the past, stored these additional valuation views in the leading ledger (multi-valuation ledger). The new approach is based on single valuation ledgers, where the unconsolidated views are separated by ledger (as before) and an additional single valuation ledger is enabled for group valuation. Figure 2 provides a schematic view of the new approach, showing two unconsolidated views (or legal valuations) in ledgers 0L and 2L and one consolidated view (or group valuation) in ledger 4G.
If you are not yet using Universal Parallel Accounting, the old recommendation to use a multi-valuation ledger continues to apply (for more details refer to this SAP Note Implementing Transfer Prices). However, with Universal Parallel Accounting the new ledger for group valuation uses the same accounting principle and fiscal year variant as ledger 0L (previously Asset Accounting did not support the use of the same accounting principle in multiple ledgers). The ledger settings are delivered as best practice business content, and since Universal Parallel Accounting is only available for greenfield customers, you may find it helpful to use this content when you perform your initial system setup. Be aware also that it is not possible to add additional ledgers once there are accounting entries in the universal journal.
Parallel Currencies for Product Costing
While the need for parallel valuations is likely to drive initial discussions in this area, the other topic of interest for many customers is the ability to use multiple currencies in parallel (see Figure 1). Actual Costing historically supported three currencies, and if you worked with group valuation then currency type 31 (group valuation in group currency) occupied one of the currency columns in the multi-valuation ledger, alongside the column for company code currency and group currency, meaning that international organizations would run out of currencies if they had a requirement for a different functional currency or an index currency in some countries. The universal journal has supported the use of ten currencies since SAP S/4HANA OP1610, but it’s now possible to have up to ten currencies in Actual Costing, allowing you to have a local currency, a group currency, a functional currency, and any other currency needed in the legal ledger and the group valuation currencies in the group ledger. With this approach all currencies are handled consistently in the actual costing run at period close.
In SAP ERP the currency and valuation profile determined whether the leading currency for group valuation was the controlling area currency (currency type 31) or the local currency (currency type 11). The leading currency was used to determine which currency would be used to value the intercompany goods transfer in combination with the price condition KW00 and the other currency would be filled using a conversion at the time of posting. The new approach defines the currencies to be used in the group ledger via the ledger settings and the currency and valuation profile becomes obsolete with Universal Parallel Accounting. Figure 3 shows a sample ledger for group valuation with currency types 11 (local currency) and 31 (group currency) and various additional currencies. In the new approach all currencies are treated equally, allowing you to have a consistent group view in multiple currencies. In other words, an intercompany goods movement will be valued using all currencies active in the group valuation ledger, rather than converting from the leading currency. Note that currency type 20 is no longer supported.
Let’s begin by reminding ourselves about the different types of prices available in SAP S/4HANA. Since the material ledger is automatically active, you can manage a different material price for the same material (group price and legal price). You can also enter different planned prices, commercial prices, or tax prices for the same material, but it is not possible to have different legal prices for the same material without Universal Parallel Accounting.
With the activation of Universal Parallel Accounting, you can use different material prices as the initial valuation of the goods movements in each ledger and to provide a basis for variance calculation in Production Accounting and the calculation of contribution margins in Margin Analysis. To support the link to the ledger and additional new functions, Universal Parallel Accounting requires the introduction of a new material price table FMLT_PRICE. Figure 4 shows the new Change Material Prices app, with the new price types (STDPR, INVPR, FUTURE, and so on) and the selection by ledger (see header).
The ability to manage ledger-specific material prices applies to both raw materials and trading goods, where the purchase price may be impacted by additional costs for freight and duty, and to finished goods, where the cost of goods manufactured may be impacted by the different assumptions behind the asset values reflected in the activity prices and overhead rates.
It is also possible to update using the material price update API and by excel upload, as shown in Figure 5, where you can either update prices ledger-by-ledger or to all ledgers.
This variety is not yet reflected in all classic GUI transactions. If you use transactions MM01-3 to look at your material prices you will only see the legal view in the leading ledger in the Accounting View. By contrast, Material Price Analysis (transaction CKM3N) shows all goods movements and settlements with respect to the ledger, as we see in Figure 6, where we are viewing the goods movements and price changes for material FG228 in ledger 4G. You can use the Curr-/Valuation field to tab through the ledgers and the various currencies configured for these ledgers, allowing material price analysis in up to ten currencies.
Standard Cost Estimates
We’ll now look at how to create the standard costs that are used as the initial inventory valuation when goods movements are posted. Figure 7 shows the Manage Material Valuations app and the contents of the Standard Cost Estimates tab. Here we see that the standard costs are also stored with respect to a ledger. In the legal ledgers, two approaches are possible. You can either create one standard cost estimate using an existing costing variant that has no reference to a ledger and use it to update both legal ledgers or you can use the new costing variants, P00L which updates ledger 0L and P02L which updates ledger 2L (or equivalent) if there are significant differences between the two accounting approaches. The cost estimate for group valuation continues to be a separate cost estimate because it supports a different valuation approach (the full BOM explosion is shown in the cost estimate and the cost components are rolled up across all company codes as before), but now the costing type links the group cost estimate with the group valuation ledger (4G).
The ability to create multiple cost estimates for the same material is not new. You could always represent the different assumptions behind your cost estimate (standard costs, forecast, and so on) using different costing variants. What changes is the link to the ledger in the costing type so that you can update the material prices in the correct ledger when you release the cost estimate. Figure 8 shows the existing costing variants (PPC1, PYC1 and PYC2 in this example), which will update the same costs into multiple ledgers and the new costing variants with different costing types per ledger (P00L, P02L, P03L).
With Universal Parallel Accounting you’ll see the ledger in the costing data and valuation data tabs of the standard cost estimate (transactions CK11N and CK13N) and in the costing run (transaction CK40N). Note that this assignment means that you can treat the costing runs differently depending on the purpose of each ledger, performing local cost estimates company code by company code but creating group cost estimates with a world-wide costing run. Material cost estimates continue to be calculated and stored in the controlling area currency and object currency and are translated into the additional currencies defined for the ledger on release.
As well as creating separate cost estimates for each ledger, you’ll need to mark and release (transaction CK24) the various cost estimates separately for each ledger as shown in Figure 9, where we have linked the company code, the ledger and the costing variant prior to releasing the cost estimates. Releasing a standard cost estimate results in a revaluation of any inventory on hand for that material and produces a journal entry for the revaluation. These standard cost estimates will be accessed to determine the ledger-specific variances on the production orders and the ledger-specific cost of goods sold for the deliveries to the customer. To find out more about how production variances are calculated in the new approach, please refer to Shuge Guo‘s blog: Production Accounting for Universal Parallel Accounting
If you work in a make-to-order environment, the best practice scope item includes new costing variants for the costing of sales orders that follow the same basic principle, the difference being that all inventories are handled as valuated sales order stock which can only be issued to the sales order that triggered the production process. Alternatively, you can create your own costing variants and link the costing types to your ledgers manually.
In an intercompany scenario, the revenues from the intercompany invoice and the cost of goods sold from the intercompany delivery will be posted in all ledgers (the cost of goods sold are ledger-dependent). In the legal ledger, the cost of goods sold are considered arm’s length trading and recognized in the delivering company. However, in the group valuation ledger an elimination posting is made that removes the intercompany cost of goods sold and posts to a valuation clearing account, as shown in Figure 10. Similarly, when the intercompany invoice is made from the delivering company to the selling company, the revenue is recognized in the delivering company in the legal ledger, but an additional elimination posting is made in the group valuation ledger that removes the intercompany revenue to a valuation clearing account.
As the goods are moved from the delivering company to the selling company, the goods movement is valued with the group standard costs calculated using the group standard cost estimate and again stored in the group valuation ledger (4G), as shown in Figure 11. There is no elimination as such, since the group standard costs used to value the goods movement do not include intercompany profit. This replaces the SAP ERP approach where price condition KW00 was used to value the intercompany stock transfer with the group standard costs.
A full description of the new options for intercompany sales and stock transfers is beyond the scope of this article. To find out more about the new approach, please refer to Gerhard Welker’s blog: Advanced Intercompany Sales and Stock Transfer
If you work with Actual Costing, there are three scenarios to consider for Universal Parallel Accounting:
- You only use Actual Costing in those locations that require it and thus need to perform a costing run only in those company codes where the local GAAP requires actual costs.
- You are in an industry that uses Actual Costing in all locations and need to create costing runs to cover all ledger/company code combinations.
- You want to run Actual Costing in combination with group valuation, and thus need to ensure that actual costing is active in all company codes associated with the ledger.
The costing run (transaction CKMLCP) is created with reference to a run template (see Figure 12) that contains the link to the ledger, the associated company codes and determines whether the run applies to a single period or year-to-date. This choice will also affect how you calculate actual activity rates – period-by-period or cumulatively over the year.
Since the templates are ledger-specific, you might only create a template for those countries with a requirement for actual costing according to their local GAAP or create templates for all ledgers. The entries in the Company Code Assignment tab will ensure that the costing run covers all plants in the selected company code (it is not possible to deselect plants in a company code). Since the costing run can be run separately for each ledger, you can perform the group valuation run independently of the legal run(s).
The costing run shown in Figure 13 references the run template to determine the relevant ledger, company code(s) and whether the costs apply to a single period or the year-to-date. As we saw in Product Cost Planning you will be calculating actual costs and updating the inventory and cost of goods sold values for each ledger separately. If you perform a costing run for the purposes of group valuation, the ledger includes all company codes in the controlling area, and you’ll need to set up the costing run to include all plants in those company codes.
Note that you will no longer need to work with a separate alternative valuation run to deliver a different legal valuation or cumulate local periodic runs for the purposes of group valuation or year-to-date calculations since the ledger alone determines the purpose and scope of the costing run and each costing run is independent of the others.
Balance Sheet Valuation
Figure 14 provides an overview of the balance sheet valuation functions supported in the past and in combination with Universal Parallel Accounting. The balance sheet valuation programs do not support group valuation.
With Universal Parallel Accounting the tax and commercial prices in the material master are removed and the various balance sheet options are represented as valuation alternatives as shown in Figure 15, where we see the methods (lowest value by market price (LVMP), lowest value by movement rate (LVMR), inventory balance sheet value (IBSV), lowest value by range of coverage (LVRC), and so on) and the link between the valuation alternative and the ledger.
The ledger is included in the Adjust Balance Sheet Accounts – Delta Posting app (transaction MRN9N) where the results of the various calculations are used to make balance sheet adjustments at year end, as shown in Figure 16.
Finally, the results of the balance sheet valuation can be displayed in the Inventory Balance Sheet Valuations app, as shown in Figure 17. Notice the fields Valuation Alternative and Ledger in the selection screen.
This approach radically simplifies organizations’ abilities to handle the requirements of different accounting principles in the area of inventory management and removes the need for significant manual work to reflect the different approaches to deal with different material prices, standard costs, actual costs and balance sheet requirements.
Given that this is the first release of Universal Parallel Accounting, it is important to compare the delivered scope with that required for your project, since functions that aren’t supported are not available in the SAP Easy Menu if the business function for universal parallel accounting is active. This means that you won’t find transactions to create material cost estimates without quantity structure or alternative valuation runs in such systems.
Universal Parallel Accounting is activated using a business function. For more details, please refer to the documentation: Business Function: Universal Parallel Accounting
For a full list of restrictions, please refer to SAP Note 3191636: Universal Parallel Accounting – Scope Information
This blog was written to coincide with the release of SAP S/4HANA OP2022. This approach was introduced earlier in the cloud world and I already described the impact on the legal valuation in my previous blog: Inventory Accounting for Universal Parallel Accounting in SAP S/4HANA Cloud 2105. It is planned to offer the functions for group valuation described here to greenfield cloud customers in CE2308 via the scope item 5W2.