Dear,
Release 9 of SAP Bank Analyzer comes with a new functionality called Smart Accounting for Financial Instruments, deeply related to the new concept of central GAAP.
For understanding the implications of the concept we have to look at the two sides of the Banking Processes.
- Operational Banking world or “world of the facts”.
- Analytical Banking world or “world of the opinions”.
Operational world is the world of our daily relationship with the Bank: disbursing a loan, paying a fee, being charged a commission, signing a contract, etc. At Operational world there is not much space for interpretation; if a client disburses 50 USD from his Credit Card, all the related magnitudes are very clear: amount, time, interest he will be charged, etc.
On the other hand, the Analytical Banking interpretation of the event depends on the Accounting Principles the bank is following.
For instance, if the bank charges the client a commission, the full amount of the commission will be considered a profit, under certain Accounting Principle, while only a partial amount of that commission will be considered a Profit under other Accounting Principal,
This different interpretation of the same event, according to different Accounting Principles, can be separated in two pieces: Nominal Accounting Entry and Accounting Principle dependent adjustments.
Nominal Accounting entries are very close to the world of the facts, they represent a transfer of value, as it happens in the operational world. Finally, Accounting Principle dependent adjustments will “adjust” the accounting entry according to specific Valuation Rules, Impairment calculations, etc.
As you can see, Nominal Accounting entries are not dependent on the accounting principles of any specific GAAP, and their amounts are reconcilable with the events in the Operational Banking system.
That is the main value proposition of the new Smart Accounting for Financial Instruments: building an accounting System which separates Accounting Independent entries (Nominal Accounting), from GAAP dependent adjustments.
Some clients and colleagues tend to think that this is not an important achievement, since most of the banks implementing Bank Analyzer – AFI have the objective of implementing as well International Financial Reporting Standards, which are meant to be common accepted accounting principles for every company, independently of the jurisdiction in which they operate.
I disagree; IFRS is meant to be a common accounting framework for analyzing quickly the company’s health, but we also need to look at the financial stability of an organization from alternative perspectives, and alternative accounting principles will fulfill this objective.
For instance, in some jurisdictions, the regulator requires that the Financial Institutions provide what they call “Shadow Accounting” statements. These Shadow Accounting statements, are basically Financial Statements, in which the Bank discloses the potential value of its portfolio, without including the Losses of the damaged Assets.
By comparing the results of the bank with and without Impairment Losses, the bank is providing an approximation to the potential and actual performance of its portfolio.
With the central GAAP approach and the Smart-AFI functionalities of Bank Analyzer 9, the bank can provide a Principal sub-ledger which follows the main Accounting Principals on this jurisdiction, and another sub-ledger following the Shadow Accounting Principals.
Additionally, both sub-ledgers can be transferred with the GL-Connector, to the Parallel Ledgers of the ECC-Finance or the S/4HANA Simple Finance System, with a seamless integration of the Financial Instruments Subledger and the General Ledger of ECC-Finance or the Universal Ledger of S/4HANA Simple Finance.
Another example; some banks represent their Expected Losses due to Credit Risk and the Value at Risk of their Market Risk exposures in their Financial Statements. Thanks to the Integrated Financial and Risk Architecture of Bank Analyzer is easy to develop a CVPM process which reads the Credit Risk-Expected Losses from the correspondent Result Type of the Results Data Layer (SKCRE) and generates accounting entries at Financial Transaction Level in the correspondent Result Type (SFISD).
But the Expected Loss Amount has different values according to the Approach the bank has followed to calculate it (standardized approach, Foundation IRB or Advanced IRB), and the correspondent accounting entries represent implicitly, an alternative Accounting Principle.
This means, that every parallel ledger of the Bank Analyzer sub-ledger, represents alternative valuations and costing sheets of the bank's Financial Instruments, providing justification of these valuations, from alternative perspectives and accounting models.
For the moment, we cannot calculate the Value at Risk in Bank Analyzer. But we can still integrate externally delivered calculations at the Results Data Layer, thus creating a gate for newer integrated scenarios of Risk and Accounting. And these scenarios will represent implicitly more Accounting Principles, and alternative interpretations for the value of the Bank's portfolio.
Join the SAP Banking Group at: http://www.linkedin.com/e/gis/92860
Looking forward to read your opinions.
K. Regards,
Ferran.
Release 9 of SAP Bank Analyzer comes with a new functionality called Smart Accounting for Financial Instruments, deeply related to the new concept of central GAAP.
For understanding the implications of the concept we have to look at the two sides of the Banking Processes.
- Operational Banking world or “world of the facts”.
- Analytical Banking world or “world of the opinions”.
Operational world is the world of our daily relationship with the Bank: disbursing a loan, paying a fee, being charged a commission, signing a contract, etc. At Operational world there is not much space for interpretation; if a client disburses 50 USD from his Credit Card, all the related magnitudes are very clear: amount, time, interest he will be charged, etc.
On the other hand, the Analytical Banking interpretation of the event depends on the Accounting Principles the bank is following.
For instance, if the bank charges the client a commission, the full amount of the commission will be considered a profit, under certain Accounting Principle, while only a partial amount of that commission will be considered a Profit under other Accounting Principal,
This different interpretation of the same event, according to different Accounting Principles, can be separated in two pieces: Nominal Accounting Entry and Accounting Principle dependent adjustments.
Nominal Accounting entries are very close to the world of the facts, they represent a transfer of value, as it happens in the operational world. Finally, Accounting Principle dependent adjustments will “adjust” the accounting entry according to specific Valuation Rules, Impairment calculations, etc.
As you can see, Nominal Accounting entries are not dependent on the accounting principles of any specific GAAP, and their amounts are reconcilable with the events in the Operational Banking system.
That is the main value proposition of the new Smart Accounting for Financial Instruments: building an accounting System which separates Accounting Independent entries (Nominal Accounting), from GAAP dependent adjustments.
Some clients and colleagues tend to think that this is not an important achievement, since most of the banks implementing Bank Analyzer – AFI have the objective of implementing as well International Financial Reporting Standards, which are meant to be common accepted accounting principles for every company, independently of the jurisdiction in which they operate.
I disagree; IFRS is meant to be a common accounting framework for analyzing quickly the company’s health, but we also need to look at the financial stability of an organization from alternative perspectives, and alternative accounting principles will fulfill this objective.
For instance, in some jurisdictions, the regulator requires that the Financial Institutions provide what they call “Shadow Accounting” statements. These Shadow Accounting statements, are basically Financial Statements, in which the Bank discloses the potential value of its portfolio, without including the Losses of the damaged Assets.
By comparing the results of the bank with and without Impairment Losses, the bank is providing an approximation to the potential and actual performance of its portfolio.
With the central GAAP approach and the Smart-AFI functionalities of Bank Analyzer 9, the bank can provide a Principal sub-ledger which follows the main Accounting Principals on this jurisdiction, and another sub-ledger following the Shadow Accounting Principals.
Additionally, both sub-ledgers can be transferred with the GL-Connector, to the Parallel Ledgers of the ECC-Finance or the S/4HANA Simple Finance System, with a seamless integration of the Financial Instruments Subledger and the General Ledger of ECC-Finance or the Universal Ledger of S/4HANA Simple Finance.
Another example; some banks represent their Expected Losses due to Credit Risk and the Value at Risk of their Market Risk exposures in their Financial Statements. Thanks to the Integrated Financial and Risk Architecture of Bank Analyzer is easy to develop a CVPM process which reads the Credit Risk-Expected Losses from the correspondent Result Type of the Results Data Layer (SKCRE) and generates accounting entries at Financial Transaction Level in the correspondent Result Type (SFISD).
But the Expected Loss Amount has different values according to the Approach the bank has followed to calculate it (standardized approach, Foundation IRB or Advanced IRB), and the correspondent accounting entries represent implicitly, an alternative Accounting Principle.
This means, that every parallel ledger of the Bank Analyzer sub-ledger, represents alternative valuations and costing sheets of the bank's Financial Instruments, providing justification of these valuations, from alternative perspectives and accounting models.
For the moment, we cannot calculate the Value at Risk in Bank Analyzer. But we can still integrate externally delivered calculations at the Results Data Layer, thus creating a gate for newer integrated scenarios of Risk and Accounting. And these scenarios will represent implicitly more Accounting Principles, and alternative interpretations for the value of the Bank's portfolio.
Join the SAP Banking Group at: http://www.linkedin.com/e/gis/92860
Looking forward to read your opinions.
K. Regards,
Ferran.
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