McParland, known as "Charlie", spent over a decade as a coach at the City Ground before a spell as caretaker manager in 2006 following the departure of Gary Megson.
His initial role will be to coach the Reds' Under-21 side.
Davies told the club's official website: "I would like to take this opportunity to welcome Charlie back to Forest.
"Like everyone in football, I am very well aware of the excellent contribution he has made to this club in the past and I am delighted to have his knowledge, experience, work ethic and passion on board.
"His first role will be to mainly work with our Under-21 squad, however we will utilise his vast experience to help the club integrate the Academy, our Under-21s and the first-team in order to streamline the progression of players through the club."
After leaving Forest McParland became manager across the River Trent at Notts County, where he spent eight years as a player. He has also undertaken coaching roles at Ipswich and Swindon.