Issue

Large multinational organisations with a global footprint such as Syensqo are typically required to report Financial Statements out of their main operational accounting systems with different accounting standards and principles in order to comply with internal group policy and regulatory accounting rules. 

In the past, Syensqo adopted the so called account-based solution to deal with multi-GAAP accounting and reporting requirements. It is based on different sets of General Ledger accounts within the operational Chart of Accounts representing the respective valuation principle which creates complications at period-end for Finance users to attain accurate statutory accounts for local reporting. It also leads to increased overhead in the system from a maintenance perspective as additional master data and system configurations need to be put in place to facilitate reporting based on local GAAP accounts.

SAP has meanwhile introduced the concept of ledgers to replace the outdated - and oftentimes painful - account-based solution for parallel accounting to handle multi-GAAP reporting requirements for its customers. For Syensqo, this means that local GAAP reporting can be performed in real-time in the future out of a parallel ledger following local GAAP valuation rules without a need for any adjustment or reclassification postings at period-end. The system will be able to produce zero-balanced local GAAP Financial Statements at any given point in time. At the same, it gives Syensqo the opportunity to further consolidate and rationalize their operational Chart of Accounts. Local accounts used for multi-GAAP reporting in the current account-based solutions are creating a larger data footprint in the system (15-25% of all G/L accounts used in the current operational CoAs are local accounts) that is no longer needed in S/4 HANA.

Introducing additional (standard) ledgers and/or currency types for a particular ledger is a time-consuming process requiring smaller-scaled data migration projects. Activating ledgers also has process implications especially with regards to period-end activities as certain closing activities are ledger-specific so introducing additional ledgers may create additional workload for business users with limited benefits. As such it is advisable to establish design principles upfront on the default ledger and currency type setup for Syensqo entities in S/4 HANA and put forth guidelines to follow for future company codes set up in the system.

The following two decisions shall therefore be made as part of this KDD:

1.) Default Ledger Setup in S/4 HANA

2.) Currency Types and Ledger Assignments

Recommendation

There are two key decisions to be made as part of this KDD, the default ledger setup (decision 1) and the definition of currency types and ledger assignments (decision 2). Each decision has multiple options - the recommendation for each decision is as follows:

a) Currency Types:

It is recommended to set up the following currency types with the specified attributes as per below table:

b) Ledgers and Currency Type Assignments:

The recommendation is to go with option A (Multiple GAAP Ledgers, Single Valuation Ledgers) for both required decisions, the proposed default ledger setup (Decision 1) explained under section 'Options Considered' and the currency type assignments (Decision 2) options laid out in the same section of this document.

For both configuration items, option A is the more future-proof and streamlined setup compared to option B with benefits clearly outweighing the drawbacks of the proposed design options.

The main business benefits for Syensqo from following the proposed design recommendations are

• Multi-GAAP accounting and reporting in real-time based on IFRS and local GAAP reporting requirements without manual adjustments.
• Additional separate tax ledger allowing for adjustments to statutory accounts for tax calculations and reporting.
• Ability to report accurate P&L according to different valuation views in real-time (legal and group).
• Leaner operational Chart of Accounts.
• Ledger design supports unified global process designs for IFRS as well as local reporting.

The main technical benefits for Syensqo from following the proposed design recommendations are

• Future-proof ledger design in line with SAP target designs (e.g. UPA readiness)
• Ledger design and currency types in line with best practice setup in the EML systems (apart from group valuation ledger/currency types which are not activated in the EML landscape)
• Low probability of additional ledger requirements in the future which would require IT support
• Streamlined ledger and currency setup allowing for easier governance and reduced maintenance efforts from an IT perspective.
• Reduced maintenance efforts from leaner Chart of Accounts (e.g. account determinations for local accounts no longer required).

Background & Context

Three key aspects need to be considered in the decision-making process on the ideal default ledger setup for Syensqo:

1.) Leading and Non-leading Ledgers

For further background information on ledgers in S/4 HANA, please expand the below section:

2.) Ledger Types

For further background information on ledger types, please expand the below section.

3.) Currency Types

For further background information on currency types, please expand the below section.

Assumptions

• Syensqo will move to a private-cloud S/4 HANA environment. This is important to call out as some configuration features for ledger and currency types are not available in public cloud environments.
• Best practice and roadmap design from SAP S/4 HANA Finance is followed to step away from an account-based solution towards a ledger-based solution for multi-GAAP accounting.
• Syensqo will not use an SDT conversion approach for migrating to S/4 HANA. New ledgers and additional currency types cannot be introduced during an SDT conversion from ECC to S/4 HANA in a standard migration scenario. SLO services are available for a conversion from an account-based solution to a ledger-based solution as part of an SDT conversion but require additional chargeable consulting services from SAP to be purchased.
• Translation of functional currency closing balances to the group’s presentation currency for consolidation purposes takes place in the consolidation system. S/4 HANA will provide accurate values for each company’s functional currency in legal valuation only.
• Transfer Pricing solution will be enabled in S/4 HANA. 
• The system design should allow for potential activation of UPA (Universal Parallel Accounting) in the future.

Constraints

• Should the Transfer Pricing solution not be enabled in S/4 HANA, the group valuation currency types become obsolete hence a revision of the proposed ledger setup and currency type assignment will be necessary.

Impacts

• Infrastructure/Basis: No impact.
• Security: No impact.
• Technical/ABAP: No impact.
• Data Migration: The data migration approach for  Finance transactional data needs to allow for introduction of new ledgers and currency types in the target system. The data needs to be migrated from local accounts (current parallel accounting approach) to the respective local ledgers (to-be parallel accounting approach) with enrichment of data for the newly introduced currency types.
  • Migration of material masters and stock balances will require extra attention due to the recommended implementation of dual valuations for the IFRS ledgers.
• Data Cleansing: No impact but data in the respective accounts for IFRS as well as LGAAP accounting shall be brought on in a tidy state with a minimal amount of open items.

Business Rules

1.) The company code currency of a company (currency type 10) must follow its functional currency.

2.) The hard currency of a company code shall follow the country currency if the country currency is not defined as an entity’s functional currency. This is to allow for accurate tax accounting and reporting in country currency.

3.) Accounting principles for the local GAAP ledger need to be defined for every country separately to pave the way for a future seamless deployment of UPA (see note 3191636 for further details).

Options considered

Two decisions are required to be made as part of this design document. Options for both decisions are proposed separately.

Decision 1 - Default Ledger Setup for S/4 HANA company codes:

Option A: Leading IFRS Ledger & Mandatory Standard Non-Leading Ledger for local GAAP Accounting & 2 separate Extension Ledgers for Tax Accounting and Commitment Updates

In this design option, a non-leading ledger for local GAAP accounting and Tax Accounting is mandated besides the mandatory leading ledger for all operational Syensqo entities set up in the system. 

Should an entity not require a local GAAP ledger currently because of identical accounting treatments between IFRS and their local GAAPs, the idea is to still activate the ledger but set it up in the same way as the leading ledger so month-end activities need not be performed for this ledger by the responsible departments. This makes the ledger setup for each Syensqo entity streamlined, future-proof and scalable with minimal disruptions and additional workloads for the business users at period-end.

For management of commitments from the Materials Management module, a technical extension ledger is also recommended to be added to the base ledger setup in this option to follow SAP’s target design for Commitment Management in S/4 HANA.

Proposed setup:

Option B: Leading IFRS Ledger & Optional Standard Non-Leading Ledger for local GAAP and Tax Accounting & Mandatory Extension Ledger for Commitment Updates

In this option, the usage of the non-leading ledgers for local GAAP and Tax Accounting is not mandated. The usage of local GAAP and Tax ledgers can be decided on by the respective Finance country managers. The decision to use or not use local GAAP ledgers must be taken at country level as Chart of Depreciations in the Asset Accounting module are defined and harmonised at country level. Depreciation areas set up in each Chart of Depreciation are linked to ledgers via accounting principles. All company codes sharing the same Chart of Depreciation are therefore required to also have the same set of ledgers set up in Financial Accounting.

For management of commitments from the Materials Management module, a technical extension ledger is also recommended to be added to the base ledger setup in this option to follow SAP’s target design for Commitment Management in S/4 HANA.

Proposed setup:

Decision 2 - Currency Type Assignments in Ledgers:

Option A: Single Valuation Ledgers with two parallel currencies

The idea behind this option is to keep separate ledgers for each valuation view. 

The leading ledger (0L) will be kept for legal valuation only while a non-leading, parallel ledger (0G) is introduced to capture the value flows in group valuation view.

For local GAAP, Tax as well as Commitment reporting only legal valuation figures are relevant hence group valuation currency types are not required in the respective ledgers. 

Proposed setup:

Please refer to the below section for further detailed explanations:

Option B: Mixed Valuation Ledgers with three fully-integrated FI currencies & two freely-defined currencies

In this option, the idea is to combine currency types from legal and group valuation into one single ledger. This reduces the storage requirements as well as the time and efforts involved in closing operations.

Proposed setup: 

Please refer to the below section for further detailed explanations:

The main drawbacks of this option are two-fold:

1. Universal Parallel Accounting (UPA) does not support the use or migration of multi-valuation ledgers once activated which constitutes a potential roadblock for future activation of UPA.
2. The leading group valuation currency type occupies a fully integrated FI currency with the other two fully integrated currencies available in the system already defaulted by the system in a non-editable way. Should there be a need in a specific entity or country to report.

Evaluation

The below table provides a summary of the pros and cons of each option explained in the above section for both key design decisions and how each option scores  with view to the below four key pillars of the overarching project principles:

• Standardisation
• Simplification
• Future-Proof
• Process Discipline

See also

Insert links and references to other documents which are relevant when trying to understand this decision and its implications. Other decisions are often impacted, so it's good to list them here with links. Attachments are also possible but dangerous as they are static documents and not updated by their authors.

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