Outlining Extension Ledgers

Max has been asked to support his colleagues in the controlling department. The controlling department often needs to change how they handle reports about Bike Company's finances. This task typically comes from Bike Company's senior management. They may ask for changes in grouping or reallocating numbers in the managerial reports. For example, they may need to move from costs from marketing to product development. This move could be due to a strategic change, or a correction to a previous period's error.

These change requests can come several months after the accounting postings were performed, meaning that the accounting period is already closed. To fix this issue, the controlling department temporarily reopens the accounting period to implement the requested changes. However, this has led to posting mistakes being processed in the open period, disrupting the financial accounting department.

Therefore, they are searching for alternatives to gaining flexibility in performing their adjustments while disrupting the financial accounting department as little as possible.

Max is thinking about using an extension ledger for these adjustments. This is a new concept for him, but he's eager to learn. He's particularly interested in the use of ledgers in SAP S/4HANA, especially the features of extension ledgers.

Let’s dive into this topic together with Max!

Max begins by reviewing his basic knowledge of the standard ledgers in SAP S/4HANA. He knows that ledgers in SAP S/4HANA are primarily used to to enable parallel accounting. But what is parallel accounting?

Parallel accounting is a process that allows a company to maintain different sets of financial records at the same time. Examples of these financial records can include:

• International Financial Reporting Standards (IFRS).

• International Accounting Standards (IAS)

• Local Generally Accepted Accounting Principles (GAAPs).

A ledger is a central repository for accounting data, housing all the journal entries for all business transactions posted to it. Ledgers form the basis for reporting and financial statements in accounting as they store all relevant transaction data and journal entries.

Consequently, all configuration settings related to a company code, such as accounting principles, currency settings, fiscal year variants (FYVs), and posting periods, must be associated with a specific ledger.

A ledger that contains a full set of configuration settings and full posting information is called a standard ledger.

There are two types of standard ledgers:

• Leading Ledger – Mandatory

• Non-Leading (Parallel) Ledgers - Optional

Every SAP S/4HANA system must contain at least one standard ledger, often known as the leading ledger (by default, ledger 0L). This ledger holds all the critical information needed for accounting postings and forms a basis for any additional ledgers that may be established for supplementary purposes.

Only one ledger can be flagged as a ‘Leading Ledger’ in a system. This leading ledger becomes mandatory for all the companies in that system, and it cannot be deactivated for a specific company.

In every company code, the leading ledger is configured with the exact same settings that are applied to that specific company code. These settings include the currencies, the fiscal year variant, and the variant of the posting periods.

In addition to the mandatory leading ledger, organizations can freely set up one or several optional, non-leading (parallel) ledgers designed to meet their specific needs. These non-leading ledgers run parallel to the leading ledger and can be based on a different accounting principle, for instance.

An example of a non-leading ledger could be ledger 2L, which defaults to International Financial Reporting Standards (IFRS), or ledger 3L, defaulting to the Generally Accepted Accounting Principles (GAAP) used in the United States. Remember, each non-leading ledger must be activated for each individual company code.

It's important to note that journal entries not specific to a certain ledger will be recorded simultaneously on each standard ledger. This means that the same accounting journal entry will be saved identically across all standard ledgers This is true for most journal entries entered in the system.

The advantage of this method is that each standard ledger has a complete set of accounting data. This starting point can then be reworked to any specific accounting standard by adding just a few adjustment journal entries limited to the relevant ledger. This procedure ensures total traceability.

However, a potential drawback of this method is that having multiple ledgers storing complete sets of data can significantly increase the size of the database.

SAP S/4HANA proposes a new kind of ledger known as the extension ledger.

Simply put, the extension ledger is used as an adjustment ledger or for reorganizing standard ledger values. Its main characteristic is its ability to staple its own values on top of a standard ledger. This results in a main advantage: no data redundancy as it automatically pulls all the data posted to its underlying standard ledger to give a complete accounting overview.

There are different types of extension ledgers in SAP S/4HANA, each applicable to different types of journal entries:

1. Standard Journal Entries: This type of ledger holds journal entries with actual document numbers. The entries are permanent and cannot be deleted, but they can be reversed if necessary. This is beneficial for parallel accounting adjustments, management adjustments, tax adjustments, realignments…

2. P - Line Items with Technical Numbers (No Deletions Possible): This category maintains journal entries that only have technical numbers and lack accounting document numbers. They too cannot be deleted but can be reversed when needed. This is ideal for predictions, commitments, and statistical sales conditions.

3. S - Line Items with Technical Numbers (Deletions Possible): Specifically for entries having technical numbers only, without document numbers. However, unlike the other two types, these entries can be deleted. It is typically used for simulations.

4. G - Journal Entries for G/L Adjustment Postings. Designed specifically for adjustment postings related to the general ledger. You can input account assignments to subledgers like fixed assets, materials, or cost centers. However, the lack of consistency checks might result, in the assignments being incomplete from a sub-ledger perspective. Furthermore, this type of journal entry doesn't support any subledger-specific function or reporting. It is used for Cash Basis Accounting for postings to be made immediately when cash is received or disbursed, and Realignment between functional areas or profit centers.

The operation of extension ledgers in SAP S/4HANA presents several advantages:

1. Flexibility: One key benefit of an extension ledger is its flexibility compared to standard ledgers. Creating a new extension ledger is simple and doesn't require data migration—only configuration is needed. This is because the extension ledger concept allows it to automatically pick up the historical data of the underlying ledger.

2. Extension ledgers are non-disruptive: Unlike the standard ledger, you can activate or deactivate the extension ledger in a live system at any point in the year without data migration.

3. Reusability of existing reports: All reports that are compatible with a standard ledger also function with an extension ledger. This holds true for both new FIORI analytical apps and classical SAP GUI reports.

4. Reduced data footprint: The extension ledger stores only delta values (the differences between valuations), which helps reduce the data footprint.

Besides these advantages, the extension ledgers also come with some restrictions:

1. No postings to reconciliation accounts are permitted: Accounts receivable and accounts payable reconciliation accounts cannot be directly posted to the extension ledger.

2. Lack of open item management: Postings are not allowed to general ledger (G/L) accounts with an open item management feature in the extension ledger.

3. No integration with Asset Accounting: The extension ledger does not integrate with Asset Accounting. This means that if your use case requires a close relationship to Asset Accounting, the extension ledger might not be the best-fit solution.

4. Limitations with automated processes: Only a handful of automated processes, such as General Ledger allocations, work with the extension ledger. If your use case requires broader automation, these limitations must be taken into consideration.

In summary, while an extension ledger offers considerable flexibility, cost-effectiveness, and a minimal data footprint, these restrictions need to be factored in when deciding whether it is suitable for specific business needs and use cases.