By Roushan Kumar Jha, Business Process Consultant, SAP India Pvt Ltd and Prasad Atmakuri, Business Process Consultant, SAP India Pvt Ltd
Joint venture accounting (JVA) is becoming a more relevant concept as the number of partner-oriented business models increase and new avenues of business combinations are taken. This article will assist business process owners, IT functional consultants, process owners, financial accountants, and aspirants in SAP consulting obtain a high-level understanding of SAP Joint Venture Accounting and the application’s integration capabilities with various types of accounting in JVA.
Benefits of Forming a Joint Venture
Some businesses require high capital investments, are subject to high risk, and can experience complications. (For example, the mining or oil & gas industries require a huge amount of investment during the exploration phase with little or no output in some cases. Only after investing a huge amount of resources for a considerable amount of time does the business become productive.)
To mitigate risk and the cost of investment, different stakeholders may come together to form a venture and operate jointly to execute the complex business processes. The advantages of running a business jointly are that the cost of investment and risk are shared by all the partners forming the venture. This type of arrangement is called a joint venture. A joint venture (JV) is an arrangement in which two or more parties come together and agree to pool their resources for a specific task. This task can be a new project or any other business activity. In a joint venture, each partner is responsible for profits, losses, and costs associated with the venture.
Business Structure in Joint Venture
The enterprises/companies that form a venture are called partners. The individual who runs the venture is referred to as the operating partner and the other partners are referred to as non-operating partners. Any partner can be the operating partner (it’s not dependent on the percentage of holding in the venture). A partner can simultaneously be involved in multiple ventures as an operating or non-operating partner.
One example of the relationship between the entities and the venture is shown in Figure 1, where we see that for venture 11 the operating partner is X and the non-operating partner is Z. At the same time, Z is the operating partner in venture 13.
Figure 1—Relationship between entities and venture in a JV
Capabilities of SAP Joint Venture Accounting
Capabilities of SAP Joint Venture Accounting apply to the different processes used in JVA. SAP Joint Venture Accounting allows the operator to manage the venture, arrange venture activities, and maintain accounting records. Using SAP Joint Venture Accounting the operator can remit venture expenses, collect revenues, and distribute these to the partners, according to their ownership shares.
SAP Joint Venture Accounting Integrations
SAP Joint Venture Accounting is an SAP module that is highly integrated with other SAP modules such as Financial Accounting (SAP FI), Controlling (SAP CO), Asset Management (SAP AM), Materials Management (SAP MM), Plant Maintenance (SAP PP), and Project System (SAP PS). The finance posting in SAP FI can be attributed to multiple ventures and therefore the cost object used in the posting helps in splitting the cost to different ventures, resulting in relevant JVA documents. Each cost object in the controlling module can be attributed to a joint venture.
SAP Joint Venture Accounting also integrates with accounts receivable (AR) and accounts payable (AP). Whenever the operating partner needs a resource, it has a provision to do a cash call to the non-operating partners. This process is carried out in SAP Joint Venture Accounting and results in the creation of customer down payment requests in Accounts Receivable. This is posted with a special Gl indicator to track JVA postings.
Integration with Controlling
SAP Joint Venture Accounting is tightly integrated with SAP’s CO module. When SAP Joint Venture Accounting is activated for a specific company code, you would be able to see the JVA fields in respective cost objects. The posting made to these cost objects triggers the JVA documents.
Ex. A single financial document for an expense can be posted to multiple cost center/cost objects which would split the cost amount among the different ventures in SAP Joint Venture Accounting.
Figure 2—JVA fields in cost object
Cost object can attribute to only one venture. Any posting trigger with this cost object will result in generation of joint venture documents. If the posting is on multiple cost objects, the expense is distributed to the different ventures. Figures 3 and 4 demonstrate finance documents that have been posted with two cost objects belonging to two different ventures.
Figure 3—Expense posting in SAP FI
Figure 4 – JVA document split by venture
Integration with Material Management
SAP Joint Venture Accounting is tightly integrated with SAP’s MM module. SAP Joint Venture Accounting derives venture coding for material movements from a special stock cost object that is assigned to a plant and a valuation type (which is optional) associated with the plant.
There should be a link between the valuation area and valuation types that you set up during standard MM configuration and the CO-based cost objects (cost centers, WBS elements, orders) that carry JVA-related information. This enables a material to be linked to a specific venture via the cost object.
Integration with Asset Management
In the oil & gas industries, huge capital expenditure is incurred for exploration and drilling activities. These expenditures get capitalized and become an asset to the venture. Apart from these expenditures, direct assets are also procured for supporting various activities of JVA. Assets in a joint venture may be jointly managed by the operating and non-operating partners or corporately managed by the operator itself.
For assets that are corporate-owned and managed in the JV company code, SAP Joint Venture Accounting derives venture coding for an asset using the cost center entered on the asset master record.
Accounting in SAP Joint Venture Accounting
SAP Joint Venture Accounting helps in accounting the information like expenditure, cash request from partner, cash received, and billing information.
Accounting in JVA can be done via two approaches:
- Operator-oriented accounting
- Partner-oriented accounting
The accounting entries can be summarized as shown in Figure 5 in the case of an operator-oriented accounting approach.
Note* similar colors represent unique accounting flow.
- Company A incurs costs running the venture.
- Company A calculates company B’s share of costs (40%).
- Company B accounts for its share of costs.
- Company B reimburses company A.
Figure 5— Accounting treatment for JVA in operator-oriented accounting
In partner-oriented accounting, the operator treats him/herself as a partner and calculates his/her share of the cost. In this method the venture behaves as an independent entity.
The process is as follows:
- The operator incurs the cost while running the venture
- The operator calculates the portion of the cost for the non-operating partner & itself
- The operator accounts for its cost
- Non-operator accounts for its cost
- Operator processes the payment for the venture
- Non-Operator processes the payment for the venture
Figure 6— Accounting treatment for JVA in partner-oriented accounting
Pre-requisite for SAP Joint Venture Accounting
Before implementing SAP Joint Venture Accounting, ensure that the business function shown in Figure 7 is already activated in the system.
Figure 7—Business function for SAP Joint Venture Accounting
- The financial Accounting enterprise structure, controlling, etc. should be completed.
- The Basic FI Configurations (House Bank, Number range, Field status variant, document type, etc.)
- The master data, including cost center, profit center, GL account, business partner, should be completed
- Basic Logistic setting should be completed
- Activate SAP Joint Venture Accounting in a Client Level (RGJX20C9). To activate SAP Joint Venture Accounting, it needs be activated at the client level.
Note* This program should be run if you are sure that you want to run SAP Joint Venture Accounting in this client & this should be done before any configuration.
Caution** Do not run this program multiple time once successful
Note** Even though we activate SAP Joint Venture Accounting at the client level, we can restrict at the company level.
Impact of SAP S/4HANA on SAP Joint Venture Accounting
With the intelligent enterprise in SAP S/4HANA, there are direct and indirect changes in the SAP Joint venture Accounting. These changes include the following:
- Master data maintenance, i.e., CVI (The partner [operator and non-operator] must be created as a business partners)
- New Asset Accounting is required in SAP S/4HANA and the possible impact should also be analyzed.
- Universal Journal Entry changes and possible impacts on the reporting and reconciliation between JVA and GL
- Asset Transfer – the following are no longer supported in SAP S/4HANA
With this article, we have explained the business context of JVA operations and provided insight into SAP capabilities to match the presented business case. Having acquired a basic understanding of SAP Joint Venture Accounting you now have a good foundation for a subsequent article, where we will deep dive into the SAP Joint Venture Accounting process and system setup to realize the business case.