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Welcome to the blog series on the Advanced Valuation Processes as announced in the Release blog SAP S/4HANA Cloud 2202 for Finance. Today, I would like to cover the Credit-Risk-Based Impairment.
Pic #1: Sequence of Period-End Advanced Valuation Processes
Due to the impairment model of IFRS 9, Expected Credit Losses (ECL) on Trade Receivables are calculated using a provision matrix, where fixed provision rates apply depending on the number of days that the trade receivable is outstanding. The template Post Credit-Risk-Based Impairment in Fiori App Schedule General Ledger Jobs was developed to fulfill the impairment model of IFRS 9.
This job calculates a loss allowance for expected credit losses on trade receivables and G/L account balances, for which there are increases in the credit risk of the business partner on the key date. As shown in the picture above, Credit-Risk-Based Impairment is one of the Advanced Valuation Processes.
For the existing S/4HANA Cloud customers, it is highly recommended to migrate your classic valuation to Advanced Valuation with the change of fiscal year (migration differences might occur).
What is the process flow for Credit-Risk-Based Impairment?
Pic #2: Overall Process Overview of Credit-Risk-Based Impairment
As shown in the picture above, the process flow for Credit-Risk-Based Impairment starts from the contracts with the business partners and the posting of GL documents by AR/AP Accountants for the contracts (Invoices, payments, credit memo). For Credit Risk Assessment, the Collection Specialists need to maintain the Risk Classes in the master data of those Business Partners with contracts. After activation of Advanced Valuation, BPC experts need to set up the Impairment Rules and Steps, then assign it to the corresponding Accounting Principle and maintain the respective Aging Increment, Probability of Default, and the G/L accounts for Impairment. The last step is the calculation of Credit Loss Allowance amount by using the template Post Credit-Risk-Based Impairment in Fiori App Schedule General Ledger Jobs on monthly basis by G/L Accountants.
The loss allowance is calculated using formula:
- Loss Allowance = Probability of Default (PD) * Open Amount
Probability of Default are defined based on:
- Aging increments of the open items
- Risk class of the business partner
The longer a certain amount has been open, the riskier the business partner, the higher is the probability of default, thus there will be more loss allowance calculated and booked to the P&L account.
What are prerequisites and the relevant Configuration Steps?
Pic #3: Configuration Overview for Credit-Risk-Based Impairment
As shown in the picture above, the prerequisites and relevant configuration steps of Credit-Risk-Based Impairment are the following:
- Define Financial Statement Version (SSCUI 102669)
- Assign Financial Statement Version to Accounting Principles (SSCUI 103215)
- Assign Semantic Tags to Financial Statement Version (SSCUI 102659*)
- Activate Advanced Valuation (SSCUI 103315)
- Define Aging Increments for Advanced Valuation (SSCUI 103049)
- Country/Region-Specific Settings for Impairment: Net or Gross (SSCUI 103741)
- Define Rules for Impairment (SSCUI 105452)
- Assign Rules for Impairment to Accounting Principles (SSCUI 105453)
- Assign Risk Class in Business Partner Master Data
*To assign Semantic Tags to Financial Statement Version, Fiori App Manage Global Hierarchies is used in case Financial Statement Version is migrated to Global Hierarchies.
Pic #4: Define Rules for Impairment
The most important configuration steps for Credit-Risk-Based Impairment can be accessed via Define Rules for Impairment under the path Finance > General Ledger > Ledgers and Valuation as shown in above picture. With this configuration, you can assign Semantic Tag to Impairment Rule (e.g., SCRI) and assign Probability of Default to Aging increment and assign G/L Accounts for Impairment. For more details about the configuration path and guidance, please check here (SAP Help Portal).
How to execute and display Credit-Risk-Based Impairment postings?
Pic #5: Post Credit-Risk-Based Impairment
As demonstrated in the picture above, credit-risk-based impairment can be posted by App Schedule General Ledger Jobs on Fiori Launchpad by using the role template SAP_BR_GL_ACCOUNTANT with following steps:
- Click Create button after opening app Schedule General Ledger Jobs
- Select Job template Post Credit-Risk-Based Impairment in Template Selection
- Specify the run time in Scheduling Options
- Specify the Parameters (Company Code, Ledger, Key date) in Parameter Section
- Click Schedule button to start the Job
Pic #6: Post Credit-Risk-Based Impairment Job Result
After the Post Credit-Risk-Based Impairment job is scheduled, the parameters entered will be read. The valuation run then takes the customer accounts as well as other balance sheet accounts, which are tagged for impairment using Semantic Tags, in the selected company code and ledger, and calculate the updated value on the open items at the key date.
The job is performed in the functional currency. If you have not set up the functional currency for your company code, it is performed in the company code currency. Besides, for each country individually you can define if the calculation of the impairment is based on the net or gross amount of the receivable.
When the job is finished, you can find the entry of this job in the previous overview table by clicking Results icon as shown in picture above.
Pic #7: Display Results for Credit-Risk-Based Impairment
The results consist of Header Information for the valuation run, the calculated results for each defined currency and log information. Error message or information for the end user can be found in the job log. The posting details will be open by clicking the icon under Type column as shown in the picture above.
Pic #8: Result of Impairment Valuation Function Currency
Fields and calculation of amounts are displayed in the result list of Credit-Risk-Based Impairment in functional currency, as shown in the picture above (exported as PDF).
Field Status Detail describes the detailed status of processing each journal entry line item and field:
- POSTED: Document is successfully processed, and changes are posted
- ZERDEL: Skipped due to zero delta
- ERROR: Error when trying to post
- GRERR: Not posted due to error in the group
- MISSBP: Skipped due to missing business partner
- MISSRK: Skipped due to missing credit risk class
Field Calc Allowance calculated loss allowance based on the open amount of line item
- Calculated Allowance = Original Amount * Probability of Default (PD)
Field Delta Allowance is the difference between the calculated loss allowance and the amounts already posted to P&L account:
- Allowance =Calc Allowance – Post Allowance
Field Valuation Line Type specifies which kind of impairment change is done during the valuation run.
- Impairment New / Change: when the calculated loss allowance is larger than the posted allowance
- Impairment Release: when the calculated loss allowance is less than the posted allowance
- Impairment Transfer in- and out: when the risk class of business partner is changed
- Impairment FX New/Change: when the loss allowance is increased by changes in exchange rate
In addition, regarding how the different grouping rules work when postings for credit-risk-based impairment are done, please check here.
Pic #9: Posting example
Let us take the Impairment Journal Entry 100000051 (Pic #8) as an example. Fiori App Display Journal Entries – In T-Account View can be used to display the Journal Entry 100000051 as shown in the picture #9 above. The prerequisites for the posting of this Impairment Journal Entry are the following:
- Account 12100000 is tagged for impairment, and it is assigned to Business Partner (ID:17100001) as reconciliation account.
- Risk Class C is assigned under Credit Profile tab in the field Risk Class of Business Partner master data (ID:17100001) under BP role “Customer (Fin.Accounting)”.
- For Risk Class C, Probability of Default (PD) is assigned with 10% for Aging Increment I90 Overdue > 90 Days in the configuration Define Rules for Impairment
- G/L Account 62020000 is assigned as account for Impairment New/Change in the configuration Define Rules for Impairment.
The original posting for the customer open item 1800000003/2020 can be found via Orig Journal Entry and Original Fiscal Year fields as shown in Pic #8. The following information can be checked via this Journal Entry:
- Original net amount for the Business Partner (BP) in this Journal Entry is 7,777 USD
- Baseline Date (Net Due Date) is 02/29/2020, so Aging Increment of the open item is I90: Overdue > 90 Days
Based on the formula: Loss Allowance = Probability of Default (PD) * Open Amount, the Calculation Allowance for Journal Entry 1800000003/2020 should be 7,777*10% = 777,7 USD. This is the exact amount posted in impairment Journal Entry 100000051/2022.
What are the Key Advantages?
The key advantages for using Credit-Risk-Based Impairment compared to classic valuation process are the following:
- Simple Account Determination
- Loss and loss release accounts only
- Post to original account (even if Open Item managed or a reconciliation account) - Value changes as delta to previous run – no reversal postings any more
- Restart capability for error handling – no Batch Processing or ECS
- Consideration of clearing postings – correction postings for cleared items
- Consideration of payments – release of loss allowance
- Change in risk class – decrease or increase of loss allowance
- Change due to net due date – decrease or increase of loss allowance
- FX effects on loss allowance
- Parallel accounting and posting in functional versus company code currencies
- Valuation of non-open items is possible
- Link between valuation journal entry and original journal entry
- Processing status details per line item – transparence of the calculation
- Valuation line type – better reporting capabilities by type of the valuation posting
- Reporting via app Analyze Credit Loss Allowances
Where to get more information about Credit-Risk-Based Impairment?
- Online help in SAP Help Portal
- Scope Item J58 in SAP Best Practices Explorer
- SAP Blog: Post B/S Reclassification for Correct Presentation of Financial Statements in SAP S/4HANA Cloud 2202
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