By now, everyone has heard about some of the major changes that occur in S/4HANA Finance, such as the Universal Journal, New Asset Accounting, mandatory Material Ledger, and so on. A huge difference between S/4HANA Finance and ECC, is the merging of the Financial Accounting (FI) and Controlling (CO) modules (the proverbial “Single Source of Truth”), and most of the Controlling functionalities are now subsumed into the Universal Journal.
In this blog, I will attempt to highlight the different areas of the Controlling Module, and how they have been changed in S/4HANA.
The first thing to note is that the original separation of Financial Accounting and Management Accounting into two distinct modules in a software system, was unique to SAP. For most companies that I worked with (usually in the US), this was a very confusing concept, and I usually heard things such as “Our previous system was only thousands of dollars, but we had better integration between Financial and Management Accounting. Now we have a system that is millions of dollars, and we have all these reconciliation issues between the two areas”. Comments like that made me wonder why SAP had that design in the first place. I learned that this was a European (typically German) style of accounting, which demanded a strict separation of Financial and Management Accounting. Financial Accounting is external, auditable (thereby precise), summarized and must adhere to Accounting Standards, while Management Accounting is internal, flexible, detailed and sometimes experimental. Separating the two modules ensured that audited financial information is not encumbered with simulations, allocations, and multidimensional reporting. The table below outlines some of the major differences between Financial and Management Accounting.
For many companies, their legacy software systems did not distinguish the two. For example, an account number would contain both financial and management accounting dimensions, such as containing 10 digits, with the first 6 digits representing the financial information, while the last 4 digits represents managerial information. An account number like 6000001000 could represent payroll for the Production department, while 6000002000 could represent payroll for the Sales department. This way, you can report on the first 6 digits for Financial Information (e.g., by account) and the last 4 digits for Managerial Information (by Cost Center). In SAP, one challenge is that the cost center and account are separated, and you need to use two or more reports to access both sets of information, and sometimes, they do not reconcile with each other (particularly with the CO-PA module). Also, Controlling transactions such as Activity Allocation, Assessments and Overhead are posted using Secondary Cost Elements, which do not show up in Financial Statements. Companies would typically create custom reports or use BI tools to bring the FI and CO data together in the same report. SAP recognized this issue over the years, and made a few attempts in subsequent releases to bridge the gap with the following changes:
1. Reconciliation Ledger: This allowed postings in the Controlling module, that were across Company Code, Profit Center or Functional Areas, to create a Financial Posting in a dedicated Reconciliation account (or scenario-based accounts). The problem with this was that the Reconciliation account (which is usually zero-balancing) is different from the Secondary Cost element, and sometimes causes confusion during Financial Statement audits.
2. Account Based CO-PA: This allowed CO-PA data by Accounts, as opposed to Value Fields, to ensure that there was easy reconciliation between the General ledger and CO-PA, particularly in the case of Cost of Sales. The problem with this module, was that there were several features of Cost Based CO-PA that were missing from Account Based CO-PA.
3. SAP General Ledger (New G/L): This brought the Profit Center and Functional Area fields into Financial Accounting, and therefore allowed some management reporting to exist in the general ledger. This was a great addition, but also a tease, because the FI module, was still missing the major CO objects such as Cost Center, Order, etc.
When SAP introduced HANA in 2012 (or so) with its in-memory and columnar based database structure, this allowed them to revamp the various enterprise applications to take advantage of the size and speed capabilities of HANA. A major accomplishment was with the introduction of the Universal Journal with Simple Finance in 2014, and has been continuously improved and enhanced on a regular basis since then.
The below diagram shows the various Controlling Submodules and what they are used for. I will then outline the changes in each area with S/4HANA using the latest version (S/4HANA 2020) as a baseline.
S/4HANA Changes in the Controlling Modules:
Cost Element Accounting (CO-CEL):
Merging of Cost Element Master in the General Ledger, with the Cost Element category being a separate field in the “Control” tab of the General ledger Master.
Secondary Cost Elements are now General Ledger Accounts, with an Account Type called “Secondary Costs”.
Overhead Cost Controlling (CO-OM)
Cost Centers, WBS Elements, Orders, etc. are fields in the Universal Journal
Controlling Documents that are generated from an FI transaction (e.g. a Accounting Entry to a Cost center) are part of the Universal Journal table (ACDOCA).
Cost Center, WBS Element and Order are Fixed Characteristics in Margin Analysis
No need for reconciliation ledger (KALC) or Realtime Integration of CO and FI. CO postings (such as Assessments, Distributions and Activity Allocations) post directly to the General Ledger using the respective secondary cost elements
Universal Allocation brings numerous allocation transactions (Plan and Actual Cost Center Assessments, Plan and Actual Cost Center Distributions, Plan and Actual Profit Center Assessments, Plan and Actual Profit Center Distributions, Top Down Distribution, etc) under one Fiori Application.
Integrated Financial Planning SAP Analytics Cloud (SAC), which covers Expense and activity planning, Product cost planning, and Sales and profitability planning.
Profit Center Accounting (EC-PCA)
Since New G/L is automatically active in S/4HANA, Profit Center is part of the General ledger
Controlling Profitability Analysis (CO-PA)
Margin Analysis (which is an enhanced version of Account Based CO-PA) is now part of the Universal Journal
Production Variance Categories can be shown by General Ledger Account
COGS Cost Component Split can be shown by General Ledger Account
Predictive Accounting can be used for Incoming Sales Orders, Statistical Conditions and Purchase Order Commitments
Attributable Profitability Segment can be used to populate CO-PA characteristics in the Universal Journal before Settlement takes place.
Realignment of Characteristics (transaction KEND) are updated in the Universal Journal, and do not create new line items.
Product Costing (CO-PC)
Work Center and Operation are fields in the Universal Journal
Material Ledger (Transaction-Based) is part of the Universal Journal
Period end transactions, such as Variance Calculation (KKS1), Results Analysis (KKAK), WIP Calculation (KKAO), Production Order Settlement (CO88) and Make-to-Order Settlement (VA88) have been made HANA-Optimized with the new transaction having an “H” suffix after the existing transaction (e.g. Variance Calculation is “KKS1H).
As you can see, although the Controlling module has been integrated (for the most part) with the Universal Journal, the subcomponents of this module still exist and have been enhanced in various ways. There may be a desire by SAP to diminish the use of the term “Controlling” to emphasize the unification of Financial and Managerial Accounting. However, this may take a while for the terminology change to happen (similar to the way people regularly use the term New G/L, even though SAP formally changed the name to SAP General Ledger back in 2010). In any case, the important thing to remember, is that the Financial and Management Accounting functions are available in several sub applications of the Universal Journal, and they can be seamlessly integrated or separated, for internal or external purposes.
If you want to find out more about Controlling in S/4HANA you can check out the book Controlling with SAP S/4HANA: Business User Guide, published by SAP Press.