Mastering Accruals and Provisions in SAP: A Practical Guide

Introduction

Accruals and provisions, though often intertwined, address different aspects of accounting liabilities. By combining the principles of IAS 37 with the power of SAP's Accrual Engine, organizations can ensure compliance, accuracy, and efficiency in their financial processes.

This article highlights SAP's role in automating and managing accruals and provisions, streamlining accounting tasks essential for robust financial management.

At the conclusion of the article, links to the configuration document are included, featuring numerous business examples.

Understanding Accruals and Provisions

Accruals

Accruals are liabilities for goods or services that have been received but not yet paid. These are certain in amount and timing and align with the matching principle under the accrual basis of accounting.

Provisions

Provisions are liabilities with uncertain timing or amount, recognized when a present obligation arises and an outflow of resources will probably be required. Governed by IAS 37, provisions require prudence and accurate estimation.

Practical Examples

Example 1: Accrual – Insurance Premiums

• Scenario: A company pays €300 quarterly for insurance from January 1 to March 31.
• Recognition: Instead of recording the entire amount upfront, the expense is recognized monthly (€100 per month). The company receives the invoice in March.
• Journal Entries:

Jan 31:

Debit: Insurance Expense €100

Credit: Accrual Account €100

Feb 28:

Debit: Insurance Expense €100

Credit: Accrual Account €100

After Receiving the Invoice in March:

Debit: Insurance Expense €300

Credit: Accounts payable €300

Debit: Accrual Account €200

Credit: Insurance Expense €200

Example 2: Provision – Legal Claim

• Scenario: A lawsuit with a 70% probability of loss and an estimated payout of €10,000.
• Recognition: The Company recognizes a provision for the likely liability.
• Journal Entry:

Debit: Legal Expense €10,000

Credit: Provision for Legal Claims €10,000

• Adjustment upon settlement:

If settled for €9,000:

Debit: Provision for Legal Claims €10,000

Credit: Cash €9,000

Credit: Legal Expense €1,000

How SAP Automates Accruals and Provisions

Business Context

The business context establishes why purchase order accruals are necessary and the value they bring to financial management.

1. Purpose of Accruals: Accruals are used to align financial reporting with the period in which costs were incurred, regardless of when invoices or payments are processed. For instance, if a supplier has delivered goods or services but the related costs have not yet been posted, accruals ensure these expenses are reflected in the appropriate fiscal period.
2. Period-End Activity: Accruals are typically part of the period-end closing process, as the full extent of liabilities is often not clear until period-end. Posting accruals allocates costs to the relevant fiscal period, ensuring compliance with accounting standards and improving the accuracy of financial statements.
3. Default Scope:?By default, accruals are only created for purchase orders involving cost assignments, such as cost centers or internal orders. However, with additional system configuration, they can be extended to purchases involving stock or fixed assets.

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Overview of the Purchase Order Accrual Process

The process is enabled by the SAP S/4HANA Accrual Engine, which provides automation, transparency, and accuracy in handling accruals.

1. Key Features: Automated accrual calculation for purchase order items based on planned and actual costs. Flexibility in customizing review and approval workflows. Integration with reporting and analytics tools, such as Fiori apps and SAP GUI.
2. Accrual Calculation: At the end of each fiscal period, accruals are calculated for purchase orders by evaluating delivery schedules, non-valuated goods receipts, or other data sources. For example: Planned Costs: Delivery schedules determine expected costs. Actual Costs: Goods receipts or invoices reflect realized costs. The system calculates accruals as the difference between planned and actual costs.
3. Integration with Period-End Closing: Proposed accrual amounts can be automatically generated or manually reviewed before posting. Adjustments, approvals, and reversals are seamlessly integrated with period-end activities.
4. Customization Options: Business rules can be tailored for thresholds, periodicity, and cost categories. Accrual postings can be fine-tuned for delta or full posting modes, and manual intervention can be enabled for complex cases.

End-to-End Process for Purchase Order Accruals

1. Create a PO: POs are created in MM (e.g., ME21N) and automatically transferred to the Accrual Engine.
2. Accrual Calculation: Based on delivery schedules or planned costs, the Accrual Engine proposes accruals for the current period.
3. Review/Approval: Adjustments can be made using transactions like?FACRARVWBU, which is a?Review for PO owners, and?FACRAAPPRVGL, which is?Approval by controllers.

4. Periodic Posting: Use ACEPOSTINGRUN to post accruals at period-end.

5. Utilization/Release: Adjust accruals based on GR/IR postings or final deliveries.

Fiori Apps for Purchase Order Accruals

Customizing for Purchase Order Accruals

Customizing is critical for tailoring how accruals are calculated, posted, and reviewed. Below are key settings and processes:

1. Core Customizing Settings

1. Accrual Engine Setup: The Accrual Engine underpins purchase order accruals, with accrual objects representing purchase orders. Key Customizing activities include assigning company codes and defining accrual item types (planned, actual, and accrual costs).
2. Accrual Item Types: Three-Step Approach: Planned Costs (PLNCST): Based on delivery schedules or linear distribution. Actual Costs (ACTCST): Captured through valuated goods receipts or invoices. Accruals (ACCRL): Calculated as planned minus actual costs, ensuring transparency. SAP delivers default types: PLNCST, ACTCST, and ACCRL.
3. Ledger and Currency Configuration: Accruals are posted to specific ledger groups, ensuring alignment with fiscal year variants. Currency handling is defined for accrual amounts, typically focusing on transactions and reporting currencies.
4. Delta vs. Full Postings: Delta Postings: Only differences between periods are posted, ideal for efficient processing. Full Postings: Reverses prior period amounts before posting new totals. Recommended for currency-sensitive environments.
5. Thresholds and Approval Rules: Customizing allows for the activation of thresholds for manual reviews or automatic approvals at the end of fiscal periods.

2. Transaction Types for Postings

Transaction types define how the accruals are calculated and posted. Key types include:

• PP (Periodic Posting): Standard periodic postings at period-end.
• UP (Utilization Posting): Adjusts accruals when invoices or goods receipts are posted.
• FP (Final Posting): Automatic release of accruals when the PO is marked as complete.
• RP (Manual Release Posting): Used for manually releasing unused accruals.

3. Enhanced Customizing Features

Recent updates in SAP S/4HANA include:

• Integration of machine learning for accrual reviews.
• New posting types for late utilization and release.
• Configuration options for archiving and historical adjustments.

Business Examples

1. Purchasing Without Valuated Goods Receipts: Example: Office Supplies without GR: Planned delivery costs are posted as accruals based on the delivery schedule. Straight-line distribution is applied when no delivery schedule is available.
2. Purchasing With Valuated Goods Receipts: Example: Direct Office Material Purchase: A goods receipt (GR) posts costs to the cost center. If only partial GRs are posted by period-end, the remaining amount is accrued.
3. Accrual Adjustments with Delivery Delays: Scenario: A PO worth 600 EUR schedules two deliveries of 100 EUR and 500 EUR for the current period. Only the 100 EUR GR is posted; 500 EUR is assumed as accrued based on the delivery schedule. Adjustment: The system proposes 500 EUR as the accrual amount, which can be reviewed or adjusted manually before posting.
4. Service Procurement with Entry Sheets: Accruals are based on service entry sheets, with costs distributed linearly if no specific schedule exists. Final accrual adjustments align with approved service completions.

Conclusion

By combining the principles of IAS 37 with SAP’s advanced tools, organizations can automate complex processes, enhance auditability, and ensure compliance with international standards. The SAP Accrual Engine and PO Accruals offer a structured, scalable, and efficient solution to manage financial liabilities.

Manual Accruals - Additional Documentation

Manual Accrual - Additional Documentation

Purchase Order Accruals - Additional Documentation

PO Accrual - Additional Documentation

What’s your experience with managing accruals and provisions in SAP? Let’s discuss in the comments below!