The concept of hydraulic or flow units has been known to the oil and gas industry for many years, but it has gained more attention in the last years. It has become common sense that the identification of hydraulic units is vital for building reservoir simulation models accurately representing the underlying geological model and preserving important geological characteristics of the fine-grid model for flow simulation. This dissertation presents an advanced dynamic flow-based methodology for determining hydraulic units based on the hydrodynamic characteristics of the reservoir. The presented flow-based hydraulic units concept aims at delineating an optimal layering for reservoir simulation.This flow-based method investigates the hydraulic communication between geological layers and allows the delineation of an optimum layering for the simulation model. The hydraulic communication between the geological layers is examined by the computation of multi-phase flow equations. Resting upon the fine-grid geological model the hydraulic units are identified based on an equilibrium of gravitational and capillary forces within each hydraulic unit (vertical equilibrium concept). This hydraulic units concept is independent from upscaling and regarded as a superior step to upscaling. The proposed hydraulic units identification approach is implemented into a research simulator. The applicability of the new hydraulic units concept is verified on descriptive examples.