What is SAP Bank Analyzer Smart-AFI?

Dear,

In the last months, several clients have asked me about the new concept of Smart-AFI of Bank Analyzer, and its differences with the traditional Accounting for Financial Instruments Module of SAP Bank Analyzer.

I’ll start with a short description of the evolution of the Accounting for Financial Instruments module of SAP Bank Analyzer until the most recent 9.0 version, which includes Smart-AFI.

The Accounting for Financial Instruments module of Bank Analyzer is the system responsible of creating a Financial Statement, including the valuation, of the Financial Instruments (Securities and Over the Counter Contracts) of a Bank. Actually Bank Analyzer call them Financial Instruments when they are securities, and Financial Transactions when they are Over the Counter contracts.

Until the Version 5,  the Accounting for Financial Instruments Module of Bank Analyzer was not a proper sub-ledger. The Version 4.2 and older versions were not capable of integrating the Financial Statements of the Financial Instruments in the General Ledger, in fact the results were stored in the Results Data Base (precursor of the Results Data Layer but much less flexible). From the Results Data Base, the system provided Data Sources for sending the Financial Statements to an specific Business Content in Business Information Warehouse. At the end we could import the Financial Instruments statements and the General Ledger Statements to a Business Information Infocube which contained the complete Financial Statement of the Bank. This approach, which “merged” the Financial Instruments Statements and the General Ledger in a Business Information Warehouse Infocube, was called Merged Scenario.

With the Version 5.0 (released 10 years ago), we got the first Bank Analyzer - AFI System which could be called a real sub-ledger, this version brought two big improvements:

- The Results Data Layer, capable of storing Accounting, Risk and other formats of data (including external Data). Foundation of the Integrated Financial and Risk Architecture.

- The General Ledger Connector, responsible of extracting the Accounting Data from the Results Data Layer and send it to the General Ledger, where the aggregated accounting entries, fully reconcilable with the Financial Instruments sub-ledger, are posted.

Version 5 of Bank Analyzer supported multi Accounting System functionalities (actually older versions supported several accounting systems too), meaning that the Financial Statements of the Financial Instruments could be generated according to different Accounting Principals (typically Local GAAP and IFRS).

And finally, we arrive to Bank Analyzer 9 and Smart-AFI. One point that we must consider when we’re thinking about Bank Analyzer-AFI is that Bank Analyzer valuates individually and builds a complete Financial Statement per individual contract (Financial Transaction or per every Security managed in an specific Securities Account), and this is a huge computing effort, when we’re valuating the portfolio of a commercial or investment bank.

Additionally, if the Bank is evaluating the portfolio according to several Accounting Systems (for instance Local GAAP and IFRS), the system suffers a double computing effort. This is the way that all Bank Analyzer versions, older than Smart-AFI, support the multi Accounting System requirements.

On the other hand, there’s a more efficient way of generating multiple Financial Statements, according to multiple Accounting Systems. Instead of creating completely isolated Financial Statements, the system can create a Central Ledger, and additional Ledgers, with the differences-adjustments, also called “deltas”, from the Central Accounting Systems to the parallel ledgers, supporting alternative Accounting Systems.

From a Legal Accounting perspective, the result is the same, but from a performance-computing perspective, the Smart-AFI is much more efficient. Smart-AFI covers the same multi-Accounting requirements, with the same accuracy and flexibility, but with much less computing effort; this is the Smart part of Smart-AFI.

Looking forward to read your opinions.

Kind Regards,

Ferran.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

IFRS 9 for Dummies.

Dear,
Last months I have given several workshops of Bank Analyzer, and the implications of the new IFRS 9 regulation, which was issued by the International Accounting Standard Board on 24 July 2014, and it is mandatory from 1 January 2018.

In some cases, I’ve seen that the IFRS 9 regulation and its implications is not fully understood; this made me think about the opportunity of writing this blog.

IFRS 9 is the new Accounting Standard for Financial Instruments, which is replacing the former IAS 39, and it covers the following topics.

- Classification and measurement of financial instruments
- Impairment of Financial Assets.
- Hedge Accounting.

The Classification and measurement part establishes that Financial Instruments must be classified according to the business model, which must be determined by the company executives, and the nature of the cash flows.

IFRS 9 also establishes two measurement category, depending on the Financial Instrument classification: Fair Value and Amortized Cost.

Amortized Cost is available for assets that meet two conditions:

1) The assets must be held in a business model whose objective is to collect the contractual cash-flows.
2) The contractual cash-flows must represent repayment of principal and interest on principal.

IFRS 9 proposes the following classification of Financial Assets:

- Debt instruments at amortized cost.
- Debt instruments at fair value through other comprehensive income with cumulative gains and losses reclassified to profit or loss upon derecognition.
- Debt instruments, derivatives and equity instruments at fair value through profit or loss.
- Equity instruments designated as measured at fair value though other comprehensive income, with gains and losses remaining in other comprehensive income.

Finally, IFRS 9 permits reclassifications when the company changes its business model or the holding of the assets.

The Impairment of Financial Assets topic has changed from the model of incurred losses on IAS 39, based on the principle that the Loans are repaid unless there’s an event producing the losses, to the model of expected losses that are recognized during the life-cycle of the Financial Asset.

Some advantages of this new approach are:
- Reduce the complexity of impairment measurements to a unified model.
- Avoids late recognition of the credit losses, as it happened during the 2008 Financial Crisis.
The Hedge Accounting part has been redesigned towards an approach which aligns Hedge Accounting with Risk Management, with the following requirements.

- Increase the available information for Risk Management, including the integration of the Risk Management policies in the Financial Statements.

- Support Hedge Accounting with internal information for Risk Management.

- Disclose the impact and effectiveness of the Risk Management and Hedge Accounting measures in the Financial Statements, including the impact of the Derivatives in the future cash-flows.

This is just a short introduction of the new IFRS 9 regulation, but this is a very important topic and we will look at it in future blogs.

Looking forward to read your opinions.
Kind Regards,

Ferran.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

IFRS 9 implications on Accounts Receivable Open Items.

Dear,
IFRS 9 implications go further than what many Banks and Corporates executives expect. For this reason, many Banks and Corporates are far from being ready to be compliant to IFRS 9, which is mandatory from January 1st, 2018.

A particularly interesting example is the management and Value Recognition of Account Receivable Open Items on IFRS 9.

According to IFRS 9 Accounts Receivable Open Items are classified as LAR (Loans and Receivables) and valuated at Amortized Cost using the effective interest method. Technically, this means to determine the Cost of Capital related to the Open Item (considering the Probability of Default of the Counter-party and Loss Given Default of the Exposure) and penalize its Nominal Value accordingly.

Remember that not only banks, but also publicly listed companies are subject to IFRS 9, which means that in 2 months they should have developed the Risk Models for determining the Probability of Defaults of their clients, and Loss Given Defaults of their Account Receivable Open Items. 

Are they going to be ready on time? We’ll see.

But let’s look at the IFRS 9 implications from the Banks perspective.

Factoring is a very common Financial Service offered by Banks for the management of Account Receivables; with Factoring a Corporate “sales” its Account Receivable rights to a Bank in exchange for cash, which means that the Bank is taking the counterparty Risk and the Cost of Capital related to the Assets (Accounts Receivable Open Items).

Again, this means that in 2 months they should have developed the Risk Models for determining the Probability of Defaults of the counterparties of the acquired  Account Receivables, and Loss Given Defaults of the related Exposures, so they can valuate the acquired assets at Amortized Cost, using the effective interest method. . 

Are they going to be ready on time? We’ll see.

But the analysis becomes a little bit more complicated when we look carefully at the IFRS 9 implications for the acquired assets. If the Bank acquiring the assets has the positive intention to hold to maturity the acquired assets, they are classified as LAR and valuated at Amortized Cost (analogously as the corporate would), but if not, they must be valuated at Fair Value, which obviously brings new challenges to the Valuation of the acquired assets.

Once again, are they going to be ready on time? We’ll see.

On the other hand, there are two different Financial Services related to  Accounts Receivable Open Items, one is the Factoring, that we analyzed above, the second one is Invoice Discounting.

With Invoice Discounting Financial Service, a Corporate borrows cash from a Bank, using its Account Receivable Open Items as Collateral of the Loan.

With Invoice Discounting, the Counterparty Risk remains in the Corporate and the associated Cost of Capital of the Account Receivable Open Items must be posted in the Corporate books. Additionally, the Corporate holds a liability (the money borrowed from the Bank) that must also be reflected in the Corporate books.

SAP offers a complete solution for the management of the Account Receivables Open Items and the Factoring and Invoice Discounting Financial Services related, combining FI-CA, Bank Analyzer and other modules, but this blog has become too long, we’ll talk about it in a future one.

Looking forward to read your opinions.
Kind Regards,
Ferran.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com