1. Chapter 27 Closing
Closing is the periodic process of reviewing system reports and executing system programs in preparing the legal financial statements of the organization.
Chapter Objectives
Provide an understanding of the closing process as it is supported by the system.
Provide an understanding of the system and business requirements involved in period-end and year-end closing.
Explain the purpose of executing the various reports and programs used to support the closing process.
As a result of this chapter, you should be able to:
Discuss the concept of closing and some of the processes involved
Discuss the business requirements for period-end and year-end closing.
Discuss the purpose of and execute the GR/IR Account Analysis Program.
Discuss the purpose of and execute the balance carry forward programs.
Perform the closing process.

2. System Requirements for Closing
Close Prior Posting Period
Open New Posting Period
Although managing the Posting Period Table is the only system requirement in the closing process, many tasks may be associated with finalizing the financial statements and preparing month end. The system provides reports and programs that fully support the closing process.

3. Period Closing Pre-closing activities Financial closing
Where do I start????
Financial closing
Managerial closing
The closing of a period is performed in three steps:
Pre-closing activities
Financial Closing
Managerial Closing
Because of SAP’s split of management accounting duties (e.g., cost center accounting) and financial accounting duties (e.g., general ledger accounting) into two different modules, you can produce the financial statements (from the FI module) before all allocations are performed.
The allocations performed in cost center accounting, do not affect the value of any given G/L account, simply the cost object associated with a portion of the value within an account.
Note: For now, think of allocations as moving expenses from one cost object to another. The allocation of overhead expenses such as utilities to the engineering and accounting departments is a typical example of this activity. You will learn about allocations in the Cost Center Accounting section.

4. Pre-Closing Activities
Post journal entries to record recurring entries and accruals.
Make sure all entries have been included from the entire system (depreciation, material valuations, salaries, invoicing complete, etc.)
Make sure all external programs affecting the trial balance have been interfaced.
A recurring entry is one that occurs on a periodic basis (e.g., depreciation, rent, etc.)
Accruals are revenue or expense items that have been booked; however, receipt or payment is not actually realized until a later period. For example, each month a company may record a portion of its annual bonus; however, the bonus is not actually paid (i.e., the expense is realized) until December.

5. Financial Closing Foreign Currency Valuation
Execute the Financial Accounting Comparative Analysis.
Create financial statements for review and analysis.
Post final adjustment entries
The topics above will be discussed in detail on the following slides.

6. Foreign Currency Valuation
Types
Receivables & Payables (when clearing)
Balance Sheet Accounts Maintained in Foreign Currency (RFSBEWOO)
Open Item Accounts (SAPF100)
The exchange rate differences associated with any of the above processes are posted with automatic line items made possible by the configuration of automatic account assignments.

7. Clearing a Receivable / Payable with an Exchange Rate Difference
Step 1 - Invoice
Amount in BRR - 4,800
Amount in USD - 5,000
200 USD
Step 2 - Payment
Amount in BRR - 4,800
Amount in USD - 5,200
When a customer or vendor invoice is posted in a foreign currency, the payment to close the item may be processed with an exchange rate that differs from that used when the original item was created.
When an invoice in a foreign currency is posted and subsequently cleared by a payment, the system posts any exchange rate difference automatically (this is an example of an Automatic Line Item).
The automatic posting of the exchange rate difference is possible because the user defines the gain / loss accounts to which the differences are posted for automatic account assignment.
Automatic Posting To Gain / Loss Accounts Configured as Realized Exch. Rate Differences

8. Revaluing Balance Sheet Accounts Managed in Foreign Currency
Posting FC Exchange Rate
Posting FC Exchange Rate
FC Account
100 FC LC
100 FC LC
200 FC LC
Month End
Exchange Rate FC = LC
Loss from Exchange Rate Difference
15LC
To be reported on the Balance Sheet in local currency, G/L Balance Sheet Accounts managed in a foreign currency must be valuated in local currency. Since exchange rates at period-end can differ from those when the transactions were originally posted, a gain or loss can exist.
Report RFSBEW00 is executed during period-end closing to valuate G/L Balance Sheet Accounts managed in a foreign currency. This report generates a batch input session to post the revenue or expense resulting from any exchange rate differences. These are not realized differences.
When account balances are valuated, the system adjusts the local currency amount in an account managed in foreign currency based on the exchange rate (from the Exchange Rate Table) on the date of the valuation.
As with the clearing of open receivables or payables with an exchange rate difference, the automatic posting of the exchange rate difference is possible because the user defines the gain / loss accounts to which the differences are posted for automatic account assignment.
The system provides the option to group accounts using an “Exchange Rate Difference Key”. This feature is useful if valuated accounts will post to different gain and loss accounts.

9. Used when running automated valuation programs Combines Specifications
Valuation Method
Used when running automated valuation programs
Combines Specifications
Exchange Rate Type
Document Types
When valuating open items or accounts using the automated programs discussed, the programs require certain specifications such as the exchange rate and the procedure with which it is to make the valuation. Valuation Methods are used to combine this information to streamline the process.

10. Valuation of Open Items
Valuation Process
Receivables and Payables
Foreign Currencies
Discounting
Receivables
Flat-rate individual value adjustment
Valuations
US-GAAP
Local GAAP
For balance sheet preparation, open items are valuated on the key date (e.g., the last day of the month). The valuation can consist of some or all of the steps highlighted above, and these steps may be configured or combined differently depending on the valuation.
Foreign Currencies - The system will valuate all items recorded in a currency other than the company code (local) currency into the local currency. Any gains or losses due to this valuation will be recorded to an appropriate gain or loss account.
Discounting - The system calculates what a long-term receivables is worth in today (i.e., it calculates the net present value) based on currency and a run-specific discount rate, which is defined in the program’s Application-side Environment settings .
Flat-Rate Value Adjustment - This procedure establishes a bad debt reserve. The system searches for all the appropriate customer items (based on days overdue and country) and carries out valuation according to a particular algorithm.
Custom procedure - SAP allows two additional procedures to accommodate, for example, Local GAAP valuations.
Custom Algorithm
Management (Political)

11. Foreign Currency Valuation of Open Items
End of Period
A / R
Different
Exchange Rate
Valuation
A / P
POSTING
Automatic (SAPFIOO)
Posted to Adjustment Account
Offset to Gain / Loss Account
This procedure is similar in concept to that used for Balance Sheet accounts managed in a foreign currency.
Report SAPF100 is executed during period-end closing to valuate receivables and payables that remain open at period-end. These open items must be valuated with the period-end exchange rates for inclusion on the Balance Sheet. This report generates a batch input session to post the entries resulting from any exchange rate differences.
The automatic posting of the exchange rate difference is possible because the user defines the gain / loss accounts to which the differences are posted for automatic account assignment.

12. Flat-Rate Value Adjustment
Customer account
( )
( )
( ) 60 50
Adjustment for:
30 days overdue: 10%
90 days overdue: 20%
Baseline dates
Receivables
Credit memos
Current Date:
1st step: Check if account has debit balance
2nd step: Clear total of all credit memo items to the oldest receivable item (baseline date) = Item 100: No revaluation
3rd step: Clear difference of 2nd step to the amount of next oldest item = > * 10 % = > revaluation amount: 63 (= 70 -7)
4th step: Next younger item: * 10% = > revaluation amount: 54 (= )
During the program run, a customer account is selected for flat-rate value adjustment if its total balance is in a debit position.
The postings are accumulated by a combination of reconciliation account and business area.
The open item update and postings can be performed for each valuation area (for example, Local GAAP, Foreign GAAP, Management view, and so on.) that you have defined in the R/3 System.
The example above illustrates how the system determines the total adjustment. If the credit memos had not existed then the first item would have received a $20 adjustment and the second item would have received a $8 adjustment.

13. Flat Rate Value Adjustment Base Amounts
Example 1
Example 2
Method
Base amount
Method
Base amount
Explanation: Flat rate value adjustment (method 3) uses the result of the foreign currency valuation (method 1). Example: 1. Open item : 100 For. Curr Loc. Curr. 2. For. curr. val. result:
3. Flat rate val. adj. result: % = 144
Explanation: Any valuation method (2,3,98,99) uses local currency amount of the documents. Example: 1. Open item : 100 For. Curr Loc. Curr.
2. Flat rate val. adj. result: % = 153
The R/3 System offers standard valuation methods, such as:
Method 1 = Foreign Currency Valuation,
Method 2 = Discounting
Method 3 = Flat rate value adjustment
In general, SAP recommends the following order of valuation programs:
Valuation of foreign currency items (SAPF100)
Flat rate value adjustment or discounting (SAPF107)
Regrouping of open items (SAPF101)
Subsequent, valuations may use the prior valuation as a basis for calculation.
Regrouping of open items can be performed on the basis of the preceding valuations.

14. Discounting Customer account Interest Rate: 10% per year
( )
( )
( )
Interest Rate: 10% per year
Discount Date: 10/01/00
Due dates
Receivables
Current Date:
1st step: Check if account has debit balance
2nd step: Clear total of all credit memo items to the oldest receivable item
3rd step: Determine if any items are due beyond the discount date
4th step: Discount Items at 10%per year
Item 2: $75.49, Item 3: $56.15
The example above illustrates how the system determines the value of receivables due in the future. The first item was not discounted because it is due prior to the discount date.

15. Discounting and Flat Rate Value Adjustment - Steps
Customizing
Customer Master
Documents
Valuat. Adj. key AB
Adjmt. Account (B/S)
G/L Acct 1
Line item
update/posting
Honda
Ford
No.: No.:
Target account (P&L)
G/L Acct 2
Etc...
Maintain parameters : Key date, reval. method, postings, doc type
Dispatch: Start time, start date, immediately
Edit valuation run:
Change valuations, display log, value list, delete
The system will automatically create a proposal; however, the user can modify these results on a line item basis prior to transferring the results to the G/L. Alternatively you can enter the desired result in the document line item (T-Code: FB02). before running the program. Any such entry will override any automatic entry made by the valuation program.
Following transfer (i.e., posting), automatic postings are generated for the results of the discounting and flat-rate value adjustment. The corresponding account determination has to be defined in Customizing.
Open receivables are sorted and reclassified on the basis of the receivables for which valuation adjustment has been carried out.
If a customer account has been selected for a valuation, it cannot be selected by other valuation runs; however, you can use alternative valuation methods, such as valuation according to national commercial codes or General Accepted Accounting Principles (GAAP).
Notes:
Configuring Discounting is nearly identical to Flat Rate Adjustments except you need to identify the discount rate and date when maintaining the parameters
A batch session will only be created after the valuation transfer if there errors; otherwise, the postings occur automatically.
No.: No.:
Valuation transfer: Forward (line item update), (sample) posting, log display

16. GR/IR Account Allocation
A Single Balance Sheet Item 2 1
Asset Account
3000
GR/IR Clearing Account
Target Account 3 4 1
The Goods Receipt / Invoice Receipt (GR/IR) Account is a clearing account for goods and invoices in transit. It is posted to as the offsetting entry whenever goods or invoices are received. It is the link between Purchasing (Materials Management Module) and Accounts Payable (Financial Accounting Module).
Before creating a Balance Sheet during closing, the GR/IR Account is analyzed with Program RFWERE00. This program allocates the net balance in the GR/IR Account to one of two G/L Accounts (depending on whether the balance is a net debit or credit) created to actually describe the net effect of the balance in the GR/IR Account.
The example above assumes only one transaction occurred during the period. The following scenario is reflected in the above scenario:
Goods received in the amount of $3,000 is posted to the appropriate Asset (Balance Sheet) Account. The system automatically posts the offsetting entry to the GR/IR Account.
The organization has been invoiced $1,000 for part of the delivery. This amount is posted to the Vendor Account and to the GR/IR Account.
At the end of the period, there remains a portion of the above order which has been delivered but not yet invoiced. Program RFWERE00 is executed, resulting in the following:
On the Balance Sheet Key Date, transfer postings are required to identify the portion of the goods delivered but not yet invoiced. The system allocates the balance in the GR/IR Account by posting $2,000 to the GR/IR Clearing Account and posting the offsetting entry to the G/L Account Goods Delivered but Not Invoiced (known as the target account).
These postings are reversed after the Balance Sheet has been created. $2, 000.
Goods Delivered but Not Invoiced
Vendor
1000 2 4 3

17. Financial Accounting Comparative Analysis
Transaction figures Indexes Documents
Customers
Vendors
G/L Accounts
Totals from:
Customers
Vendors
G/L Accounts
Totals from:
Customers
Vendors
G/L Accounts
Program SAPF190
Program SAPF190 compares totals contained in the indexes and
documents (customers, vendors, G/L accounts) with the corresponding
account balances.

18. End of Period Reporting
Balance Sheet / Profit and Loss Statement
General Ledger Account Information System
Financial Statement Versions
Key Figure / Ratio Reports
Special Purpose Ledger - for reports with more customized format.

19. Year-End Closing
Account Carry Forward: Customer / Vendor Balance Carried Forward
General Ledger Account Balance Carried Forward
The same process is followed for year-end closing as that followed for period-end closing, with the addition of a requirement to carry forward account balances to the next year.
The G/L Account Balance Carried Forward Program (SAPF011) processes General Ledger Accounts in the following manner:
Income and expense accounts are closed out to Retained Earnings and start the new year with a zero balance.
Balance sheet accounts are carried forward to the new year with the year-end closing balance.

20. Automatic Line Items Balance Carried Forward
A Profit and Loss Key is assigned to each Profit & Loss G/L Account master record in the P&L Statement Acct. Type field. Only the Profit and Loss Keys configured with a G/L Account assignment under Transaction / Event Process Key BIL (Balance Carried Forward) can be used.
Each Profit and Loss Key must be assigned a Retained Earnings G/L Account. When the G/L Account Balance Carried Forward program (SAPF011) is executed, all revenue and expense G/L Accounts will be closed into this Retained Earnings Account and will have a zero balance carried forward into the next year.
The G/L Account Balance Carried Forward program carries forward the profit or loss to the corresponding Profit or Loss Carry Forward Account.

21. Managerial Closing Preliminary close of controlling accounting period.
Reallocation and settlement of costs throughout the entire organization.
Review and analysis of internal reports.
Re-opening of the controlling accounting period to correct and adjust accounting data.
Run FI-CO Reconciliation ledger
Execute readjustment programs to ensure Business Areas and Profit Centers are in balance

22. Closing Chapter Summary
Key Terms:
Closing
Valuation
Valuation Method
Flat Rate Adjustments
Discounting
GR/IR Account
Balance Carry Forward
Closing - the periodic process of reviewing system reports and executing system programs in preparing the legal financial statements of the organization.
Foreign Currency Valuation - The process of converting accounts and open items to the local currency and creating postings for exchange rate differences so as to generate the balance sheet/income statement.
Valuation Method - A configuration item where valuation run specifications are stored.
Flat Rate Adjustments - Deducts a percentage of an overdue item and adds it to a bad debt account.
Discounting - Calculates the net present value of an open item that is not yet due.
GR/IR Account - A clearing account for goods and invoices. It is a link between the MM and FI modules.
Balance Carry Forward - transfer of prior year’s profit/loss to the corresponding equity account.