Logic of Bookkeeping in an ERP Environment Heikki

”Logic of Bookkeeping in an ERP Environment” Heikki Puomila 12. 04. 2017 Copyright: Heikki Puomila/KLBR Industries Oy

Prework to familiarize Good understandable material available in http: //siliconlabs. fi/main ERP Basics Basic business process overviews with views from SAP R/3 ERP Copyright: Heikki Puomila/KLBR Industries Oy

Opening Copyright: Heikki Puomila/KLBR Industries Oy

Introduction: Heikki Puomila KTM HKKK 1990 -1994/1998 KPMG – 1994 -2000 Financial audit IT audit (CISA) SAP Audit & Controls Passionate trainer KLBR Industries Oy … Supercell – 11/13 -> “Finance” i. e. Accounting & Reporting, Tax, Share-register System: Netsuite ERP Nokia – 2000 -2012 SAP development & project management Training Audit & accounting literature Financial Shared Services SAP brochures Led Nokia Sarbannes-Oxley program and Internal controls CISA IT Business Controller Nella Kaneli – 05/12 + sabbatical Leadership focus Hanken/SSE CPP 2011 Copyright: Heikki Puomila/KLBR Industries Oy

Agenda Introduction Your experience Accounting basics – how I learned it Accounting in practice – ERP/SAP examples ERP architectures finance view • Q & A’s all the time, please Copyright: Heikki Puomila/KLBR Industries Oy

Your experience Which class: 1, 2, 3, 4, 5+ What to be: Who want to be CFO Business Contoller? Auditor? Accountant? Developer? Accounting training Accounting basics What else? Work experience on accounting ERP at work? Accounting, Warehouse? Elsewhere? Copyright: Heikki Puomila/KLBR Industries Oy

ERP - CFO view? Cost or value ? Enabler ? Strategic advantage ? Non-understandable ? Too much data ? Role of COO<>CIO<>CFO ? ”ENTERPRICE RESOURCE PLANNING” With all the data Do companies have discipline to use the data and be data driven organizations ? Copyright: Heikki Puomila/KLBR Industries Oy

Why would you need this information? ERP's are widespread Understand big picture and enough of details Understand the processes Systematic errors accumulate End users need to know their contribution to financials? Copyright: Heikki Puomila/KLBR Industries Oy

Accounting basics – HKKK 1990 Profit & Loss Balance Sheet Sales Assets Inventories -Discounts etc -Material purchases +/- Change in inventories Gross Margin -Operating expences Operating Profit Depreciation Interests Taxes Inv. raw materials Inv. fin. goods Financial Assets Accounts receivable Accruals / deferrals Bank etc -------------------- Equity Liabilities Loans Accounts payables Accruals & deferrals ’Change in inventories’ in P&L Existence of sub-ledgers (reskontrat) Volume of transactions in rehersal cases vs real life Consolidation Product costing or ABC accounting (Riistama-Jyrkkiö) Copyright: Heikki Puomila/KLBR Industries Oy

Accounting in simplified form Journal report General ledger report Copyright: Heikki Puomila/KLBR Industries Oy

Accounting in simplified form Copyright: Heikki Puomila/KLBR Industries Oy

Accounting in practice – ERP/SAP example Accounting logic in ERP is all about configuration & master data Configuraton update by developers Master data update by end users (centralize) Data hierarchy & account assignment logic P&L and BS links in interated logistics – actually basics simple, configuration not that simple, and volume of transactions create pain Interfaces from other systems Transaction accounting –> Closing –> Subsidiary financials Management reporting <-> Legal consolidation (integrated up-to Consolidation or not ? ) Copyright: Heikki Puomila/KLBR Industries Oy

Let's roll. . . General Ledger Accounts Payable Accounts Receivable Copyright: Heikki Puomila/KLBR Industries Oy

Let's roll. . . Revenue process Material purchase process Operating expenses purchasing process General ledger entries Production process postings Bonuses: Asset accounting Intercompany posting aspects Other inventory postings Copyright: Heikki Puomila/KLBR Industries Oy

Volume of transactions typically Revenue process (# xxxxx) Material purchase process (# xxxxxx) Operating expenses purchasing process (# xx) General ledger entries (# x) Automated general ledger closing entries (# xxx) Production process postings (# xxxxxx) Bonuses: Asset accounting Intercompany posting aspects Copyright: Heikki Puomila/KLBR Industries Oy

Revenue process - Order to cash Source: http: //siliconlabs. fi/files Copyright: Heikki Puomila/KLBR Industries Oy

Revenue process – ERP Master Data Sales Order Goods Issue Sales order -> (no postings until invoicing) MM/Movement type: goods issue Customer code -> Accounts receivable; General Ledger reconciliation account Material code -> Profit center e. g. Business unit X Sales info records -> price e. g. per customer Acc'ts receivables Sales Plant code -> Legal company code (delivery plant, can be different than sales cocd, ref. To intercompany postings) Material code -> Inventory and cost of goods sold account (e. g. raw materials or finished goods) Material code -> unit price of material (std or avg) Inventories Finished goods 100 (3) (4) Payment Delivery Sales area -> Legal sales company code Material code -> Sales/Revenue account Invoicing Cost of goods sold (3) Bank acc't 100 150 (4) 150 (5) VAT/Tax postings excluded for simplification 150 Copyright: Heikki Puomila/KLBR Industries Oy

P&L and BS references Profit & Loss Balance Sheet Sales Assets Inventories -Discounts etc -Cost of Goods Sold Co. S (goods issued) Mat. to production Mat. from production Gross Margin -Operating expences Operating Profit Other inc. /exp. Depreciation Interests Taxes Inv. raw materials Inv. fin. goods Financial Assets Accounts receivable Accruals / deferrals Bank etc -------------------- Equity Liabilities Loans Accounts payables Accruals & deferrals Copyright: Heikki Puomila/KLBR Industries Oy

Revenue process – Before ERP’s Master Data Sales Order Goods Issue Invoicing Payment Legacy accounting systems logic typically Sales, inventory accounting and logistics in non-integrated systems with interface to accounting Key difference: Inventory related cost impact posting done via ’change in inventories’ Profit & Loss account (+/-) typically at period end on totals Though, you can build similar logic with ERP, but is it wise? Acc'ts receivables (4) 150 Sales Inventories Change in inventories (P&L) Bank acc't 150 (4) 150 (5) 100 (6) 100 (5) 150 Copyright: Heikki Puomila/KLBR Industries Oy

Source: http: //siliconlabs. fi/files Copyright: Heikki Puomila/KLBR Industries Oy

Material inventory purchase process Master Data Purchase Order Goods Receipt Purchase order (no postings until goods receipt) MM/Movement type: goods receipt -> account Vendor code -> Accounts payables; General Ledger reconciliation account Plant code -> Legal company code (warehouse) Material code -> Material Inventory account (e. g. raw materials, semi-finished goos or finished goods) Acc't Payables Inventories (3) 95 (4) (5) 95 GR/IR concept Posting key: vendor posting debit or credit ’Matching account’ to record liability posting from GR and match to invoice posting Quantity or price differences -> accuracy in PO & GR! -> Beware: DUMBSTER on your backyard GR/IR matching Goods receipts/ Invoice receipts 100 (3) 100 5 (4) Payment Goods delivered (input only PO # & quantity) Purchase organization -> Legal company code Price -> from contract based master data or manual entry Invoicing (4) Bank account VAT/Tax postings excluded for simplification 100 95(5) Copyright: Heikki Puomila/KLBR Industries Oy

P&L and BS references Profit & Loss Balance Sheet Sales Assets Inventories -Discounts etc -Cost of Goods Sold Co. S (goods issued) Mat. to production Mat. from production Gross Margin -Operating expences Operating Profit Other inc. /exp. Depreciation Interests Taxes Inv. raw materials Inv. fin. goods Financial Assets Accounts receivable Accruals / deferrals Bank etc -------------------- Equity Liabilities Loans Accounts payables Accruals & deferrals Copyright: Heikki Puomila/KLBR Industries Oy

Material inventory purchase process – Before ERP’s Master Data Purchase Order Goods Receipt Invoicing Payment Legacy accounting systems logic typically Material purchases to an equivalent P&L account Oftentimes summary bookings from non-integrated inventory accounting systems with interface to accounting -> challenge in matching inventory goods receipts value to posted invoices (in SAP ERP the GR/IR concept) Note: Still, inventory related cost impact posting done via ’change in inventories’ Profit & Loss account (+/-) typically at period end on totals Though, you can build similar logic with ERP, but is it wise? Acc't Payables Material purchases 95 (4) (5) 95 95 (4) Inventories Bank account 0 (PE) Ch. In Inv. 0 (PE) 95(5) Copyright: Heikki Puomila/KLBR Industries Oy

Operating expenses purchasing process Master Data Purchase Order Goods Receipt Purchase order (no postings until goods receipt) Invoicing Payment Goods delivered (input only PO # & quantity) Purchase organization -> Legal company code MM/Movement type: goods receipt -> account Vendor code -> Accounts payables; General Ledger Plant code -> Legal company code (used also for reconciliation account operating expense purchasing) ”Material” code -> cost account Invoicing & GR/IR concept Cost assignment -> cost center Posting key: vendor posting debit or credit ’Matching account’ to record liability posting OPEN ORDER BOOK? Quantity or price differences -> accuracy in PO & GR! -> Beware: DUMBSTER on your backyard Acc't Payables Operating expense (3) 95 (4) (5) 95 Accruals GR/IR Goods receipts/ Invoice receipts 100 (3) 100 5 (4) Bank account VAT/Tax postings excluded for simplification 100 95(5) Copyright: Heikki Puomila/KLBR Industries Oy

P&L and BS references Profit & Loss Balance Sheet Sales Assets Inventories -Discounts etc -Cost of Goods Sold Co. S (goods issued) Mat. to production Mat. from production Gross Margin -Operating expences Operating Profit Other inc. /exp. Depreciation Interests Taxes Inv. raw materials Inv. fin. goods Financial Assets Accounts receivable Accruals / deferrals Bank etc -------------------- Equity Liabilities Loans Accounts payables Accruals & deferrals Copyright: Heikki Puomila/KLBR Industries Oy

Operating expenses purchasing process Before ERP’s Master Data Purchase Order Goods Receipt Invoicing Payment Legacy accounting systems logic typically Invoice is approved (services, rent, office supplies, mobile telephony bill. . . ) Invoice is posted and paid Control of committed purchases low as orders not recorder at start of process Accruals GR/IR Goods receipts/ Acc't Payables Operating expense Invoice receipts 95 (4) (5) 95 Bank account 95 (4) 95(5) Copyright: Heikki Puomila/KLBR Industries Oy

General ledger entries G/L Account Master data Posting keys Cost assignments Document type Document Refs & headers No real difference to other accounting systems, but automatic and configuarble controls of data integrity are better and extensive – key examples (equivalent also to bank account & treasury postings) G/L account master data drives requirements to cost assignment postings -> is e. g. cost center, profit center, material code required Posting key determines account type and debit or credit (e. g. 31 vendor + DB; 01 customer + CR; 40 GL account + DB; 50 GL account + CR) G/L account master data for reconciliation accounts between AP & AR and asset accounting G/L account master data to protect automatic posting accounts (e. g. from logistics transactions) to avoid loss of data integrity and fraud Document type can be determined for external system interfaces only or even use restricted with authorizations (e. g. hiding fraud transactions to document type with inventory postings) Document headers and reference fields oftentime used to provide additional information, which then can be used for data sorting and search (e. g. accruals per unit) DATA STRUCTURES allow systematic preventive control (not always effectively configured) but also sophisticated detective control (not used often) Copyright: Heikki Puomila/KLBR Industries Oy

P&L and BS references Profit & Loss Balance Sheet Sales Assets Inventories -Discounts etc -Cost of Goods Sold Co. S (goods issued) Mat. to production Mat. from production Gross Margin -Operating expences Operating Profit Other inc. /exp. Depreciation Interests Taxes Inv. raw materials Inv. fin. goods Financial Assets Accounts receivable Accruals / deferrals Bank etc -------------------- Equity Liabilities Loans Accounts payables Accruals & deferrals Copyright: Heikki Puomila/KLBR Industries Oy

Asset accounting Asset master data Depreciation area Asset class G/L accounts Asset accounting is integrated to general ledger Asset master data (individual assets) are linked to asset classes and further to depreciation areas Asset classes are linked to different type of accounts e. g. Buildings, software, hardware. . . Depreciation areas determine the depreciation rules Asset and depreciation accounts are linked to master data and all postings go via individual assets (purchase, periodical depreciation run, scrapping etc) Copyright: Heikki Puomila/KLBR Industries Oy

P&L and BS references Profit & Loss Balance Sheet Sales Assets Inventories -Discounts etc -Cost of Goods Sold Co. S (goods issued) Mat. to production Mat. from production Gross Margin -Operating expences Operating Profit Other inc. /exp. Depreciation Interests Taxes Inv. raw materials Inv. fin. goods Financial Assets Accounts receivable Accruals / deferrals Bank etc -------------------- Equity Liabilities Loans Accounts payables Accruals & deferrals Copyright: Heikki Puomila/KLBR Industries Oy

Production process postings (Warning: becoming complicated) Production order Material ”intake” Production in practice Purchase order (no postings until goods receipt) Production Confirmation Variance Analysis’ Goods delivered (input only PO # & quantity) Purchase organization -> Legal company code MM/Movement type: goods receipt -> account Vendor code -> Accounts payables; General Ledger Plant code -> Legal company code (used also for reconciliation account operating expense purchasing) ”Material” code -> cost account Invoicing & GR/IR concept Cost assignment -> cost center Posting key: vendor posting debit or credit ’Matching account’ to record liability posting OPEN ORDER BOOK? Inventories – raw. mat Quantity or price differences -> accuracy in PO & GR! -> Beware: DUMBSTER on your backyard Inventories – Finished goods 100 (2) Materials to production (2) (4) 140 Materials from production Variance accounts 100 140 (4) Copyright: Heikki Puomila/KLBR Industries Oy

P&L and BS references Profit & Loss Balance Sheet Sales Assets Inventories -Discounts etc -Cost of Goods Sold Co. S (goods issued) Mat. to production Mat. from production Gross Margin -Operating expences Operating Profit Other inc. /exp. Depreciation Interests Taxes Inv. raw materials Inv. fin. goods Financial Assets Accounts receivable Accruals / deferrals Bank etc -------------------- Equity Liabilities Loans Accounts payables Accruals & deferrals Copyright: Heikki Puomila/KLBR Industries Oy

Other inventory postings Inventory and warehouse management modules are based on multiple movement types (all of which do not generate accountg postings) Scrapping Physical inventory count and approval Warehouse location movement Quality inspections etc Special: Intercompany transactions between sales company and factory (also more sophisticated models between sales company and IP ”holder” company) Copyright: Heikki Puomila/KLBR Industries Oy

Financial Reporting Dimensions in SAP PCA - Profit Center Accounting CCA - Cost Center Accounting CO-PA – Profitability analysis PS – Project system accounting IO – Internal order accounting Copyright: Heikki Puomila/KLBR Industries Oy

ERP architectures Design of logical data architecture crucial for company growth enablement Flexibility of company structures Common master data Global configuration principles One global system/database or local system installations Most local accounting requirements are not ”musts” Cost of reimplementation high – courage Copyright: Heikki Puomila/KLBR Industries Oy

How to obtain more value of ERP ’Finnish country accounting JV SScenters CFO & Group controller agenda SLA based fully outsourced SSC Intercompany transaction automation (enforced TP policies) m ntu a Qu p lea ? Regional shared service centers Country competence centers Metallic 36 Common master data processes Common accounting processes Local accounting departments Local accounting systems One global chart of accounts Common accounting systems Bronze Process specific shared service centers Business model supporting optimized FI automation Globally centralized closing team AP invoice processing center Scanning & AP workflow processes Segregated accounting & Business control Low cost location shared service centers Globally centralized Treasury Collection globally centralized Organization change flexibility Job description harmonization Silver Source: Hanken CPP 2011 training groupwork (Puomila et al) Gold Platinum Copyright: Heikki Puomila/KLBR Industries Oy

Recap Understand big picture and ”enough of details” Understand the processes as finance professional Non-finance end users need to know their contribution to financials Work is not only about ”what you know of ERP”, but more and more ”how you work & influence using the data” ! Copyright: Heikki Puomila/KLBR Industries Oy

Q&A THANK YOU ! ! ! Copyright: Heikki Puomila/KLBR Industries Oy