Handling US Tax Depreciation in SAP (Part 2): Separate Books

After the previous post introducing the basics of US tax depreciation, I realized that there is one item that I must explain before proceeding with anything more advanced on this topic.

Blog Series:
Handling US Tax Depreciation in SAP (Part 1): The Basics
Handling US Tax Depreciation in SAP (Part 2): Separate Books
Handling US Tax Depreciation in SAP (Part 3): Basis Adjustments
Handling US Tax Depreciation in SAP (Part 4): Prior Year Adjustments

First, I need to explain the purpose of our blogs. In general, we don’t want to get into training-level posts on our website.  Why?  There is already enough documentation online explaining the basics of ‘what is a company code’ and ‘what is a field status group’ that there’s no reason for us to go down that road.  There isn’t any benefit to go over information when SAP itself is the one doing the documentation.  Most of this basic information is already online and can be easily found if you just search for it.

Our goal is to provide awareness, insight and personal experience related to the topic in order to provide better perspective and information on how to navigate the complexities of SAP.  That said, it’s important that this next (basic) topic be covered before we keep talking about taxes.

 

Two Groups Playing in the Same Sandbox

Like I said in the opening blog, one of the interesting items about working with fixed assets is that it straddles two different groups.  Tax and the Corporate Accounting group.  Here are some key differences between tax and corporate accounting in terms of what they focus on regarding fixed assets:

  • Multiple Valuations — In general, tax requires multiple valuations whereas the accounting group only requires one.  There are a few exceptions to this for corporate accounting related to currencies and parallel valuation.  The currency situation is more of a software limitation and will be going away soon.  Parallel accounting valuations are legitimate but these are more for accounting purposes than depreciation valuation purposes.  Minus those two examples, it’s basically a single area for corporate versus multiple for tax.  Tax tends to manage the federal tax valuation (both bonus and non-bonus), AMT (both bonus and non-bonus), E&P, ACE, and multiple state tax values.  That’s a lot more for them to handle.
  • Depreciation Methods — For the accounting group, they usually depreciate assets using a single convention; straight line.  Tax has dozens of requirements over these different valuations and each can have variations based on their purchasing pattern (i.e., mid-quarter) or recent tax law changes (i.e., bonus).
  • Basis Adjustments — Tax is far more concerned about making cost basis adjustments to the asset records.  For US GAAP, the asset record’s APC cost just needs to represent the aggregate cost to procure the asset… it’s purchase cost, taxes, shipping, fees, installation, etc.  I’m going to discuss this in a separate blog but tax routinely needs to make basis adjustments to the asset because it’s to their advantage to do so.  And, it’s not just in the primary federal tax book but in the others as well.
  • Timing — This too will be discussed separately but tax has to consistently adjust the asset data in prior (and closed) fiscal years without upsetting the corporate values.  Corporate accounting almost never does this.
  • Reporting — Tax has to provide some fixed asset specific (actually, more like depreciation specific) reporting values in the IRS forms that they file.  I’m not aware of any for corporate reporting.

 

How Does SAP Satisfy This?

How does SAP do this all on the same asset record? SAP lets us value the asset using a Depreciation Area though we often refer to them as ‘books’…  tax book, AMT book, corporate book, etc. Each asset is assigned to a list of depreciation areas that are configured based on valuation, reporting, and regulatory requirements during the implementation.  The asset is assigned the list of areas indirectly from the company code that the asset is created in. This ensures that all records in a given company are going to track the same sets of values consistently. There are a couple of key points to remember about depreciation areas and how they work:

  • An asset is assigned to multiple depreciation areas so that multiple valuations can be managed.
  • Values are posted to each area separately.
  • Depreciation methods are maintained separately on each area.
  • Each area is independent of the other.  There are a few exceptions to this but for the normal areas, values and depreciation methods can be (and often are) different between the areas on the same asset.  ex: changing a depreciation method for the Federal Tax book does not influence the methods assigned to the AMT book.
  • Having multiple areas assigned allows for the valuations to be parallel to one another.
  • All of the asset reports can be run by depreciation area.  This lets us report on one area separately from another.
  • From a technical perspective, the depreciation area is in the key of every table that stores an asset value.  The main reporting table, the line items tables, and of course the asset master data table that tracks the different depreciation methods.  The point is that it’s not some calculated reporting construct… it’s a fundamental part of the technical architecture of the FI-AA subledger.

The key words to pick up on from that list are Multiple, Separate, Parallel, and Independent.  If that doesn’t start to draw the picture for how they work, this image below will help.  This is an old image from the SAP training course on FI-AA (S4F17 if you’re interested).  It shows how we define the depreciation areas for each chart of depreciation.  But the user never sees the chart of depreciation… it’s assigned to the company code so it is the company code that indirectly controls what set of areas will be assigned to the asset when it is created.  For instance, if you create an asset in a company code assigned to the US chart, you’ll get the list of areas on the right.  If you create the asset to a company code assigned to the German chart, you’ll get the list on the left.

 

SAP says more in the online help.  It’s basic information but worth reading if you are new to this.

 

Why Am I Covering This?

While researching some items online for this blog series, I stumbled upon this post from a tax accounting firm: “Why Your ERP Is Not Going to Work for Tax Depreciation (and what to do about it)“.

 

Well, this gets to the very point of this blog series so I have to address it!

The post identifies the following 5 items as roadblocks to using an ERP system as the correct tool for the tax department to track depreciation. Most of what is wrong with it is related to the separate, multiple, independent, and parallel nature of the depreciation area that I’ve highlighted above.

 

Here’s my rebuttal:

  • Timing — I’ll get into this in a separate blog but SAP allows for us to reopen prior closed fiscal years for the tax books independently of the corporate book.  This way we can go back multiple years (there is no limitation), make entries specifically to the tax books, then close them back up.  At no time is the corporate book touched or in jeopardy.
  • IT Support — This is only valid if you have a bad solution and design.  It’s normal to configure a new transaction type or depreciation key for a truly new requirement.  That shouldn’t be a negative mark on the IT group.  If it’s an expected requirement that has never been requested or configured, then that’s the fault of whoever is implementing the system.  For instance, I’ll configure mid-quarter tax keys because I know that they are likely to eventually be used.  That way they’re available when necessary.  But the rest of what I’m covering can all be executed directly by the end-user.
  • Difference — This is true but the tax personnel that we work with have access to the tax books and can maintain them if necessary.  They know that those depreciation areas are theirs to manage and control.  Trust me when I say that most accounting groups don’t want to tread into those areas… that’s a tax problem, not theirs.  Secondly, we can maintain defaults for those areas so that when new asset records are created, they get the correct tax treatment (ex. MACRS 5 year double-declining mid-year, AMT 5 year 150% declining mid-year).  However, it is the tax department’s responsibility to go back and make changes if there is a regulatory change.  That’s normal data maintenance based on changes that occur throughout the year.
  • Marriage? — As documented above, the asset does manage each depreciation area but those areas are separate and independent.  Yet, at the same time they are still associated with the same record.  I suppose you could say that they’re still ‘married’ but they don’t have to have the same values.  I’ll blog on this later but you can make basis adjustments separately, have different depreciation conventions, etc.
  • Reporting — The reporting that SAP delivers throughout ERP tends to be basic.  A lot of the reports are list-driven but that lends itself well to fixed assets.  Each report has to be run by depreciation area so it’s possible to look at those values for Federal Tax, AMT, ACE, etc. all separately.

Lastly, it’s important to acknowledge that the author and I are on opposite sidelines.  He’s listing out points to push customers to niche software and I’m trying to show you that it can be done within SAP.  Keep that in mind when reading it.

 

How Does It Work In SAP?

Let’s take a look at some quick screenshots in SAP to see how these areas work.  The best place to do that is at the Asset Explorer.  This single transaction shows us all of the asset values, transactions, and depreciation parameters per depreciation area.  In the image below, SAP presents all of the depreciation areas related to their appropriate ledger.  As you select each area, the values on the right are updated.  As said above, all of the values are keyed by area.  I’ve selected the Federal Tax book (area 10) and can see the transactions and aggregate values as well as the depreciation calculated for 2020.

 

If I click on area 01 for the Corporate Book, the figures are updated. In this simple example, only the planned depreciation for 2020 is different because of a different depreciation method that was chosen. The initial acquisition of $10,000 was posted uniformly to all areas so the cost basis is the same between area 01 and 10.

 

The asset explorer is also good at showing multiple areas simultaneously. If I go to the Comparisons tab, I can select multiple areas and display their values over any fiscal year range needed.

 

Lastly, let’s go over to the technical side and show the table contents of table ANLC for this asset. ANLC is the main asset reporting table and the source for nearly all asset reporting. You can see that for this single asset record, it stores the cost and depreciation values separately for each area. Each area is independent of the other and can track different values from the others.

Note: ANLC stores approximately 65 different asset values but for blogging purposes only, I’ve hidden the rest of the fields in this table to make it more presentable.