In the first blog, I showed that SAP can handle the basic requirements regarding US tax depreciation. The second blog had to go back and quickly review one of the foundational org elements of the subledger regarding valuation; the depreciation area.
For this blog, I’m going to cover basis adjustments.
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
Postings From Tax
The tax group frequently has to perform basis adjustments to their respective areas and on the assets that need it. This is often required for both the cost balances and the depreciation reserves balances. It’s usually based on some specific regulation for a specific type of asset(s)… but in the end, it’s an adjustment to the asset capitalized or net value. Fairly simple.
This is easily done in both ECC or S/4HANA though it’s gotten easier in S/4. I’ll cover ECC first.
Adjustment Postings in ECC
In ECC the adjustments are all based on the transaction type (TTY). Below I’ve created two transaction types to perform a basic cost adjustment to the tax books. This is just an example so a basic pair of TTY is sufficient though it can sometimes be necessary to create more TTYs for more advanced posting or reporting requirements.
On the other side I’ve created two transaction types to perform adjustments to the reserve balance.
Below is the first test asset. I’ve posted a simple $100,000 acquisition to it. This line item was posted equally to all depreciation areas. As a starting point, area 01 shows the $100k acquisition on the asset. Down below, the transactions panel shows two transactions. The first is the acquisition for $100k using TTY 100 and the second is our new tax adjustment debit TTY X01. But for the book area, it’s recorded a 0.00 amount. i.e., the corporate book is not updated by this posting so it’s only balance is from the initial $100k transaction.
Same asset but now we’re looking at area 10. Notice that the 2nd transaction using the X01 TTY has an amount of $25,000 for a total capitalized cost of $125,000 USD. Area 01 above had a balance of $100k but the same asset in the tax book now has a value of $125k.
Rather than step through each area, here is how the comparison tab looks. Area 01 has the $100k acquisition value but the other four tax areas have a cost basis of $125k. Since they all have different depreciation conventions (12 and 13 happen to be the same), the calculated depreciation for fiscal year 2020 is different as well. The values are all separate and managed independently of one another. This is what tax and corporate accounting want; independent control over their own set of values.
Here is a second example. Asset 100002 has a $50,000 capitalized cost in area 01. Note the two transactions that make up this figure and that the second posting using TTY X02 has a 0.00 amount. Similar to the earlier example, this tells me that a document was posted but it must be related to one of the other areas on the asset.
Looking at area 10, the amount for the 2nd line item using TTY X02 is $8,000- resulting in a net capitalized balance of $42k.
But on area 11, the amount is 0.00 for this TTY. Why? Because that’s how I posted it! When I made that transaction I specified one amount for area 10 and a different amount for area 11. Even within the range of tax books, I can control the posting independently… AND with more configured TTY I can improve the line item reporting that goes along with this requirement.
Last Example… I’ve gone back to the second asset above and posted some additional depreciation expense to areas 10 and 11. This is one (of many) ways to show an impairment… or maybe it’s just that the tax group wants the net value at year end to be some amount. Either way, the below screenshot shows how area 01 is still unchanged at $50,000.
But area 10 has an additional depreciation charge (write-down) of $1,800.
Area 11 has the same posting for the same amount though it could have been different if I had bothered to enter a different figure. Also, I could use the other TTY X90 to post a debit depreciation posting but I think the point has been proven.
To finish it off, area 12 is unaffected. I could have posted an amount but choose to limit it only to areas 10 and 11. It still has the original $50,000 cost basis and a calculated amount of depreciation.
These examples show how you can uniquely post to the tax areas for both the cost and reserve balances. Area 01 is untouched in all of these examples.
Adjustment Postings in S/4HANA
With the New Asset Accounting solution, which is available in both ECC and S/4HANA, this process has gotten easier. One of the benefits of it is that the depreciation area and accounting principle are now directly on the posting screens. In the past, we had to use TTY for this purpose which means we had to configure new ones. That’s not hard to do but the system transport approval process (i.e., paperwork) isn’t fun, nor is it easy to do when you have postings that must be in by the end of the day for year end close. Now, the user can choose what areas they want to post to for any asset transaction and any transaction type.
Below is one of the many posting screens that we have in FI-AA. The one change in this screen from the Classic FI-AA solution in ECC is the new [Area Selection] section highlighted in red.
All of the areas available for postings can be pulled up and selected as required. For convenience, you can instead select the accounting principle which will then automatically select all areas assigned to that principle. i.e., IFRS or US GAAP.
Even though this process has gotten simpler in S/4HANA it doesn’t mean that the tax group wouldn’t benefit from having a customized set of transaction types. At a bare minimum, I’d recommend the 4 above to control the two major value types. But this is at a very macro level. Once you start discussing reporting requirements or parameters where you want those TTY to be limited by area, it’s likely that more transaction types would be necessary and/or some custom validation work to ensure the posting process is uniform.