IFRS 16 compliance in Leasing Contracts with SAP Flexible Real Estate.

Dear,
As you know, world’s economy is constrained by two forces, limited growth and huge debt, which make capital scarce.

As a consequence, regulators have adapted the Accounting Standards to the requirements of this new economic environment, which is triggering a systemic transformation of the economy, from a model based in Volume, to a model based in Efficient Management of Capital.

We have discussed in the past, how Basel IV and IFRS 9 increase the recognition of the critical value of Capital in the new environment.

Today we will look at the new IFRS 16 Accounting Standard, which increases the visibility of the Cost of Capital in Leasing Contracts.

Traditional Nominal Accounting considers a Leasing Contract as an off-balance commitment, which is only represented in the accounting books at the time of invoicing. But commitments represent taking a risk which consumes Capital, and this Cost of Capital is not visible under Traditional Nominal Accounting. For this reason a new Accounting Standard has become necessary.

Regulators are very aware of the new economic system, constrained by Capital scarcity, and come with a new regulation for Leasing contracts

IFRS 16 postulates that the value of a Leasing Contract is determined by determining the current value of all the future expected Inflows and Outflows of the Leasing Contract (Fair Value).

The procedure for determining the Fair Value is analogous to other IFRS Accounting Standards (IFRS 9, IFRS 17) which discounting these expected Inflows and Outflows according to an Interest Rate, that represents the Price of the money without risk and a Spread representing the risk that the expected Inflows and Outflows do not become actual.

The calculation represents a huge technical challenge, as it represents the necessity of integrating flows of data from very heterogeneous sources, The key word is Integration, and this has been the main value proposition of SAP for the last 40 years.

In a typical scenario, the valuation of a Leasing Contract under IFRS 16 with SAP RE-FX requires managing 4 sources of Data.

- Invoicing Data.- The Leasing Contract manages the generation of Payment Flows from the Contract tenant to the Landlord. The Payment Flows are generated by the Contract Financial Conditions and used in the determination of the Fair Value of the Contract.

- Underlying Asset (Leased Asset) Depreciation.- The Capital associated to the Underlying Asset is committed to the Contract, at the moment of the Contract activation. On the other hand, the Depreciation costs of the Underlying Asset determine the Profitability of the Contract and the residual value of the underlying asset.

- Maintenance Costs of the Underlying Asset (Leased Asset).- The costs associated to the maintenance activities, necessary for keeping the Underlying Asset in working order during the contract duration, determine the Profitability of the Contract. Consequently the Planned Maintenance Costs of the Underlying Asset determine the Capital Committed to the Contract at the moment of the Contract Activation.

- Market Data.- Discount Interest Rate for determining the current value of the future Inflows and Outflows combine the Market Interest Rate without Risk for the maturity of the Leasing Contract, plus an Spread, representing the risk that the Actual Cash Flows do not match the Expected Cash Flows.

From SAP ECC release EhP6 upwards and S/4HANA, SAP provides a new functionality for Valuation of Flexible Real Estate Contracts.

Simplifying, the configuration has two elements:

1) Generation of the Expected Cash-Flows of the Leasing Contract with the functionality of the SAP RE-FX Financial Conditions.

2) Configuration of what Financial Conditions are taken into account in the valuation of the Leasing Contract and in which way.

As the Financial Conditions generate Cash-Flows payable by the Contract tenant, a new group of Statistical Financial Conditions have been included in the system. These Statistical Financial Conditions generate Cash-Flows that are not included in the invoice to the tenant, but can be included in the IFRS 16 Valuation.
For Instance.- The Maintenance Costs can be represented with Statistical Financial Conditions that will be taken into account by the valuation, without being included in the amounts payable by the Contract tenant.

The integration capabilities of the Plants Maintenance, Assets Accounting, Service Management, Profitability Analysis and Flexible Real Estate modules of SAP ECC and S/4HANA, support the reconciliation between the expected and actual Cash-Flows, the accurate valuation of the Leasing Contracts under IFRS 16 and full compliance with the new Accounting Standard.

Additionally, and this is critical in an environment of Capital scarcity, the holistic vision provided by the integration of the above modules, support the Optimization of the resources committed and allocated to the Leasing contracts, reducing the Capital consumption and maximizing the company sustained profitability.

Looking forward to read your opinions.
K. 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

Implementing a Capital Optimization model with SAP Bank Analyzer.

Dear,
The Financial System is in the middle of a Systemic Transformation, from a Business Model based in Volume to a Business Model based in Efficient Management of Capital.

The increasing Capital Requirements levels (specially after the implementation of Basel IV), low growth rates of the Global Economy and huge Global Debt (around $233 trillion) are putting a big pressure in Banks’ Solvency positions.

The pressure in the Banks’ Capital positions is not a temporary fashion, Capital scarcity is here to stay and makes Capital Optimization the main priority for Banks’ executives.

As you could see in previous blogs, in my opinion SAP Bank Analyzer is the best Capital Optimizer in the market.


https://www.linkedin.com/pulse/capital-optimization-clearing-houses-blockchain-sap-bank-frances/

https://www.linkedin.com/pulse/capital-optimization-trading-activities-sap-bank-analyzer-frances/

https://www.linkedin.com/pulse/capital-optimization-investment-activities-sap-bank-frances-gil/

http://sapbank.blogspot.com/2017/06/capital-optimization-and-business-case.html

http://sapbank.blogspot.com/2014/05/liquidity-and-capital-optimization-with.html

http://sapbank.blogspot.com/2016/03/impairment-calculations-and-capital.html

But for some reason that I can’t understand, it’s difficult to find voices explaining the Bank Analyzer capabilities as a Capital Optimizer.

I'll try to put my two cents for changing this with this blog.

1) The first step in a Capital Optimization process is measuring accurately the Capital consumed in every market segment that the bank is exposed to.

This is the main value proposition of the Integrated Financial and Risk Architecture of SAP Bank Analyzer.

Bank Analyzer – Credit Risk module will calculate the Risk Weighted Assets of every contract, every risk exposure of the bank’s portfolio, and consequently the Regulatory Capital consumed.

Once we know the Capital consumed by every Contract/Exposure, we can aggregate the Capital consumed according to the analytical dimensions that we have defined in the Bank Analyzer-Results Data Layer, and consequently we will know the Capital consumed in every market segment in which the bank operates.

Alternatively, the SAP Bank Analyzer Credit Portfolio also give us the Economic Capital consumed by market segment, and all the complementary parameters to the Capital consumed.

2) The second step in a Capital Optimization process is the efficient assignment of Collaterals to exposures for reducing the Risk Weighted Assets and the Capital consumed.

The assignment of Collaterals to Exposures is not always an static assignment. The 1 to 1 assignment of a Collateral to an exposure is just the trivial case, but it’s usual that several (n) exposures are assigned to several (m) collaterals.
In case (n) exposures are assigned to (m) collaterals there’s an Optimal Distribution of the Collateral portions to the Exposures, which reduces the Risk Weighted Assets, and consequently the Capital consumption. This is the basis of the Dynamic Management of Collaterals that we discussed in a previous blog, and we will analyze again in a future one.


https://sapbank.blogspot.com/2012/09/capital-management-chapter-v-dynamic.html

The Bank Analyzer – Credit Risk Module has strong capabilities for the Optimal Distribution of Collaterals to Exposures in the Level 2 of the Calculation of the Risk Weighted Assets. These capabilities look at the Probabilities of Default and Exposures at Default of the Exposures and the Collaterals Values, adjusting efficiently the assignment of Collateral portions to Exposures.

3) The third step of a Capital Optimization process is maximizing the Banks profit reducing the Capital Consumed. Every market segment has a potential expected profit, and every market segment has a potential Expected Loss, and consequently a potential Capital Consumption.

Optimizing Capital means identifying the market segments with higher Expected Profit weighted by the Expected Capital consumed of the market segment.

This is the most difficult element of a Capital Optimization process, because it requires a double-synchronized simulation, looking for a solution which minimizes the Risk Weighted Assets maximizing the Expected Profit.

This optimization engine is still not available, but the Integrated Financial and Risk Architecture of Bank Analyzer has been designed for having an Integrated and Reconcilable vision of Risk and Accounting (Profit).

The IFRA is the technical foundation for running cycles of simulation that Capital Managers should run for achieving the Optimal Planning of the bank’s portfolio, reducing the RWA and maximizing at the same time the expected Profit.

Finally, the future will require the automatic calculation and simulation of banks investments, for proposing the Optimal Sales and Execution planning of the Bank. I’ve personally worked in some of this models, by adapting the Theory of Constrains to portfolio management.

These simulations require very strong computing capabilities, but this is the value that SAP HANA provides for solving the problem.

Looking forward to read your opinions.

K. 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

Optimizing the Chart of Accounts in SAP Bank Analyzer Smart-AFI and the Universal Journal.

Dear,

Previous versions of SAP ECC and Bank Analyzer gave a preeminent importance to the Posting Key Figures over the GL-Accounts.

From the first SAP R3 release, the Costing Based Operating Concern of the Profitability Analysis module gave us a very flexible framework for building a complete multidimensional Profit and Loss analysis engine. The only difficulty is that the Costing Based Operating Concern is built on Key Figures which makes difficult its reconciliation with the Profit and Loss postings of the General Ledger which are built in GL-Accounts.

On the other hand, we could also use the Account Based Operating concern of the Profitability Analysis module, which provides a complete multidimensional Profit and Loss analysis engine built in GL-Accounts, fully reconcilable with the General Ledger Postings, but the reconciliation problem with the Costing Based Operating Concern remains.

In both cases, we are talking about non-financial related postings. Concepts like Fair Value or Risk-related Costs are very difficult to model in the Profitability Analysis Module of SAP ECC. For covering this gap, SAP developed something new.

The new concept was the SEM-Banking (Strategic Entreprise Management for Banks) module of SAP ECC (IS-Banking), which was the precursor of SAP Bank Analyzer, and the first tool capable of providing a Contract (or more exactly Position) based multi-dimensional Cost-Analysis framework for Banks. Again, SEM Banking was built on Key Figures (Costing Based Operating Concen), with the commented advantages in terms of flexibility and disadvantages in terms or reconciliation.

With Bank Analyzer, SAP solved the problem. In Bank Analyzer we don’t have a Cost Based “Operating Concern” and an Account Based “Operating Concern”, instead the Posting Key Figures and the GL-Accounts are integrated in the same structure (the RDL Result Type) and we can find both in the Financial Position Object.

Nevertheless, this improvement also brought some difficulties; in Bank Analyzer (before Smart-AFI) the Posting Key Figures and GL Accounts of the Accounting entries are not determined at the same time. The Posting Key Figures are determined first (from the Item Type of the BT or the Calculation Step), and later the GL-Accounts.

In fact, the accounting logic is technically configured in the Posting Key Figure (Key Figure Class) and there’s no configuration in the GL-Account, which in Bank Analyzer (before Smart-AFI) was merely the value of a Characteristic with no configuration.

As a consequence of this, it was technically possible to assign a GL-Account to a Posting Key Figure with a different accounting nature, generating serious inconsistencies on the Financial Statements of the Bank.

I’ve seen several clients with bad implementation of Bank Analyzer, with inconsistent Financial Statements, as a consequence of an incorrect configuration of the Posting Key Figures and GL-Accounts determination.

Bank Analyzer Smart-AFI has tackled the above problem simplifying the Accounting Logic Configuration. With Bank Analyzer Smart-AFI, the GL-Accounts are at the center of the Accounting Logic, and they are technically defined with the Accounting Role that they must play, reducing the risk of the inconsistent configurations mentioned above.

By the way, this is coherent with the new Accounting Logic of the Universal Journal of S4 HANA, where we don’t build the multidimensional Profit and Loss analysis engine with Cost Based or Account Based Operating Concerns. All the accounting entries are centrally posted in the Universal Journal, in the form of Coding Blocks and GL-Accounts.

As you can see, in Bank Analyzer Smart-AFI, the GL-Account has become a central pillar of the configuration, and consequently, the Chart of Accounts Optimization has become one of the most critical activities in a Bank Analyzer implementation.

Optimizing the Chart of Accounts has always been a key success factor in a Bank Analyzer implementation. Suboptimal definitions of the Chart of Accounts bring accounting systems difficult to maintain, and in some cases, inconsistent Financial Statements. Smart-AFI brings a new a more simplified accounting architecture. It’s the responsibility of the implementation team to take advantage of it.

Looking forward to read your opinions.

K. 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 and IFRS 15 Business Case with SAP Revenue Accounting and Bank Analyzer.

Dear,

Since January the 1^st 2018, Banks and Corporates should be compliant to the new Accounting Standards IFRS 9 and IFRS 15.

In my opinion, most of Banks and Corporates are far from being ready to be compliant to these legal requirements and we will see some examples in the oncoming months.

On the other hand, there is some confusion about the implications of IFRS 9 and IFRS 15, so I’ll try to make a short description with a practical example.

IFRS 15 is relevant for Contracts with customers with particularly visible implications in contracts combining the delivery of Services and Goods.

For instance, a Telecommunications company confirms a contract with a customer committing to deliver Internet access for 12 months for 35 EUR/month and a subsidized Wifi Router for 50 EUR.

Before the IFRS 15 Accounting Principle was implemented, the above contract would produce a revenue in the Telecommunications company of 35 EUR every month, and a one-time revenue of 50 EUR (for selling the Router).

With the implementation of IFRS 15 the company is required to adjust the revenue recognition to a Fair Price of the two sold elements (Router and Internet Access) and the completion of the commitment with the client (deliver the Router and provide the Internet Access). For instance, the Router has been sold to a lower price (subsidized) because the client has committed with a 12 months contract of Internet Access, so it seems logical that a portion of the revenue for selling the router is distributed during the 12 months of the Internet Access.

The International Accounting Standard Board proposes a 5 steps process for fulfilling the IFRS 15 requirements.

Step 1.- Identify the contract with the customer.- This first step has been run just above, identify the contract with the client, in which the company commits to deliver a bundle of services and goods.

Step 2.- Identify Separate Performance Obligations.- Performance Obligations are the promises to the client to transfer Goods or Services. In the above example, the two Performance Obligations are, delivering the Internet service and the Router. At the same time, the company must identify the Stand Alone Selling Price of each Performance Obligation, which is a “Fair Price” that the company would charge for the goods or services if they were sold separately.

The current version (1.3), SAP Revenue Accounting and Reporting does not have the capacity of determining the Stand Alone Selling Prices, but the company can use average historical prices for determining the Stand Alone Selling Price of each Performance Obligation.

In this example we would assume that the Stand Alone Selling Price of the Internet Access is 40 EUR/month and the Stand Alone Selling Price of the Router is 55 EUR.

Step 3.- Determining the Transaction Price which is the actual price that the company is charging to the client for each Performance Obligation. In this case the Transaction Prices are 35 EUR/month for the Internet Access and 45 EUR for the Router.

Step 4.- Allocating the Transaction Price to each Performance Obligation in an amount that depicts the revenue that the company can recognize for delivering the Goods/Services to the client. In our example, they are the following.

Performance Obligation	Transaction Price	Standalone Selling Price	Allocated Amount	Calculation of the Allocated Amount
Router	50 EUR	55 EUR	48 EUR	470*55/535
12 month Internet Service	35*12=420 EUR	40*12=480 EUR	422 EUR	470*480/535
	470 EUR	535 EUR	470 EUR

Step 5 .- Recognize revenue when each performance obligation is satisfied.

Month 1.- Performance Obligation 1 is fully satisfied and Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 48 EUR + 35.17 EUR

Month 2.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.17 EUR

Month 3.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.17 EUR

Month 4.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.17 EUR

….

Month 10.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.17 EUR

Month 11.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.16 EUR

Month 12.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.16 EUR

On the other hand, when the company issues the invoices to the client, the company assumes a Credit Risk that the client is not paying the due amount.

IFRS 9 describes the process for measuring the Expected Loss, which starts by determining the Probability of Default of the Client, based in a Credit Risk model which classifies the Client according to the payment behavior of the clients belonging to the same Risk segment. This process is called Historization and is supported by the SAP Bank Analyzer System.

The second step is determining a Fair Value provision that will reduce the recognized revenue until the client makes the payment. The provision amount is determined by the Key Date Valuation of the AFI-Bank Analyzer module, by discounting the Cash-Flow (due amount) with a Yield Curve with the same maturity of the Cash-Flow and the correspondent Spread of the client’s Probability of Default.

Obviously the provision will increase if the client does not make the payment on time, and the Account Receivable becomes impaired.

SAP offers a complete business suite for fulfilling the requirements of the new Accounting Standards. Unfortunately, technical and functional skills for implementing them are scarce, making the implementation projects very challenging.

Looking forward to read your opinions.

K. Regards,

Ferran.

www.capitency.com

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

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

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Financial Instruments Product Costing Planning with SAP Bank Analyzer.

Dear,
Capital Optimization requires efficient planning, providing management with the necessary information for having resources when they are requested, and taking corrective actions in case of deviations.

Planning relies in accurate Product Costing, assuring that profit and margin objectives are fulfilled in every financial period.

Product Costing for Financial Products has three dimensions; Risk driven Capital Costs, Funding Costs and Process Costs.

1) Risk driven Capital Cost.- IFRS 9 and Basel III require that every bank develops a Risk Model which supports the estimation of the Expected Loss of every Financial Asset. The Expected Loss represent the values of the potential losses in a Financial Asset, multiplied by the probability of that loss occurring, and it is the basis for determining the Fair Value Provisions and Capital Requirements of the Bank. The Fair Value Provisions and Capital Requirements represent a cost for the bank, which must be included in the Product Costing estimations of the bank.

Bank Analyzer -AFI supports the determination of the Fair Value Provisions (IFRS 9) and Bank Analyzer – Credit Risk supports the determination of the Credit Risk Capital Requirements (Basel III), according to the Expected Loss of the Financial Asset. Credit Risk Capital Requirements can be included in the Financial Asset Statement (AFI sub-ledger) as Off-Balance Postings, representing the Capital Cost of the Financial Asset, assuring that the sales price will cover the Risk Driven Capital Costs.

Assuming that the bank has a consistent common risk model per Financial Asset, it means that we can assume a direct relationship between the Expected Loss for Capital Requirements (Basel III) and Fair Value (IFRS 9), to the extent that gives the bank an opportunity to reduce Fair Value provisions in case of excess of Capital Requirements determination.

This double approach of the Expected Loss (Solvency and Accounting) per Financial Asset is a very interesting Value Proposition of the Integrated Financial and Risk Architecture.
Bank Analyzer stores the Expected Loss in the Credit Risk Result Type, and the Fair Value Provisions on the Accounting Result Type of the Results Data Layer. In both cases the results are stored individually per every Financial Asset which opens the gate for representing the Capital Requirements as Accounting Provisions per Financial Asset.

Capital Requirements must be determined under base and stressed scenarios, for this reason, in practical terms, Product Cost Planning requires the bank use Standard Costs, that must be reconcilable with the Expected Loss of the banks risk model, and Capital requirements estimations. This reconciliation is also supported by the Integrated Financial and Risk Architecture of Bank Analyzer.

2) Funding Costs.- The bank has to get liquidity from the market, compensating the liquidity consumed in Lending and Investing. Bank Clients and Capital Markets provide this liquidity at an interest rate, which represents a cost, that the bank must include in the cost estimations of its products.

Liquidity requirements fulfillment are a shared responsibility by all the bank branches and Treasury department. Some branches get liquidity that others consume, with the Treasury department compensating liquidity requirements or excess in the Capital Markets. In exchange for covering the liquidity requirements of other branches, liquidity providers receive internal transfer of the funding cost value (transfer price for liquidity). We’ll talk about this in more detail in a future blog.

3) Process Costs.- In order of getting clients and managing investing and contracts with them, the bank needs resources; staff, information systems, branches, etc. Every contract has to support a fair distribution of its related banks costs, assuring that the selling price is higher enough for assuring a positive margin. The fair distribution of the banks process costs is achieved with the cost analysis model of the bank, using Management Accounting techniques for services like Activity Base Costing, Internal Cost Orders, Cost Center Accounting, etc.

As you can see above, the first two families of costs are financial services driven, while the third is general services driven. Integrating all in the same Financial Statement requires a seamless integration between the Analytical Banking and the ERP System. This is the main advantage of combining SAP Bank Analyzer and S4 HANA Universal Journal, combining in the a unified Financial Statement, all the revenues and cost of a Financial Instrument, so the bank will have the profits and losses of every business segment, and the allocated capital.

We looked at the concept briefly in a previous blog.

https://www.linkedin.com/pulse/why-bank-analyzer-afi-sub-ledger-anymore-chapter-ii-ferran-frances/

And we will come back to this topic, in more detail, in a future one.

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

SAP Performance Management for Financial Services (FS-PER).

Dear,

Recently, we finished a Proof of Concept of SAP Performance Management for Financial Services (FS-PER), in a client which implemented Bank Analyzer – AFI some years ago.

SAP has always had strong Cost Management and Accounting functionalities, even in SAP R2, which was the first SAP system I ever put my hands on.

Today, we have SAP Finance and Controlling, Business Planning and Consolidation, and some Cost Management and Accounting Functionalities in Bank Analyzer (Profit Analyzer), so, when I first heard about SAP Performance Management for Financial Services, I thought it should have an overlapping with other SAP Systems.

I was wrong, SAP Performance Management for Financial Services covers an important gap that we had with previous Cost Management systems in Financial Services.
One of the main challenges we have in Banking implementations is the data collection from multiple legacy systems, with different sets of master and transactional data. It’s very difficult to find a Bank which has a Single Source of Truth for Operational data. Usually, Business Partners, Contracts, Products, etc. are stored in multiple systems with a different set of values in every legacy system of the bank.

In SAP Bank Analyzer, we have the Source Data Layer for building a Single Source of Truth of Operational Data, but the Source Data Layer Primary Objects are oriented to the management and storing of “banking” master and transactional data (business partners, financial transactions, business transactions, positions, etc.)

On the other hand, managing “non-banking” data like process-costs, assets-amortization costs, etc. in the Bank Analyzer Source Data Layer, is not that simple.
Actually, these costs and revenues are more easily managed with the Accounting Management modules of  SAP-ECC or SAP Business Planning and Consolidation. But, what happens when we want to merge banking and non-banking data in a Cost Analysis model, or the client stores the Cost Management data in a legacy system?

For instance, let’s look at the direct cost that a foreign bank charges to our bank because our clients use the foreign bank ATM machine; this cost is posted as an invoice for a service provided by a vendor. If the foreign bank gives us the list of the ATM-cards using its ATM machine, we should post these costs as a direct cost of every account related to each of the ATM-cards.

With SAP Performance Management for Financial Services, we can easily collect the invoice cost from the Vendor’s Invoice and post it in the Bank Analyzer – Results Data Layer. Once in the Results Data Layer, we can include the ATM-card costs of the foreign bank in the cost and profit analysis of our client’s accounts (Financial Transactions).
In my opinion, this is the main advantage of SAP Performance Management for Financial Services, its capacity of integrating in a cost analysis model, data from different and heterogeneous sources.

SAP Performance Management for Financial Services supports data collection from the Bank Analyzer Source Data Layer, the General Ledger, HANA tables, external data, etc. and write the results in Business Warehouse or Business Planning and Consolidation Infocubes, or, as I mentioned before, in the Bank Analyzer Results Data Layer.

Additionally,  SAP Performance Management for Financial Services offers data cleansing capabilities, that we also can find in other SAP systems (BW for instance). The advantage is we can optimize the process of data transformation by having all the elements in the same system.
In terms of Data Transformation and Calculation, SAP Performance Management for Financial Services comes from a very rich library of functions for Costs Settlement, Funding Price Calculation, etc.

Finally, SAP Performance Management for Financial Services comes with two pieces of Business Content; Sample Content for Profitability and Efficiency Management and Business Content on Solvency II. The business content can be used as a template for our own Financial Calculations and Transformations, accelerating the implementation process.

Combining the functionalities of SAP Performance Management for Financial Services with the functionalities of the new Financial Services Data Platform and the high performance computing of HANA, SAP is offering us a powerful business suite for Profit Analysis in complex banking landscapes.

Looking forward to read your opinions.
K. 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 15 for Banks with SAP Revenue Accounting.

Dear,

From January 1st 2018, a new Accounting Standard becomes mandatory for reporting the Revenue Recognition in Contracts with Clients IFRS 15, becomes effective.



IFRS 15 enhances the process of Revenue Recognition by establishing a 5 steps process.

1) Identify the contract with the customer.

A contract with a customer falls within the scope of IFRS 15 if all the following conditions are fulfilled.

- The contract has been approved by the parties to the contract

- Each party’s rights in relation to the goods or services to be transferred can be identified

- The payment terms for the goods or services to be transferred can be identified

- The contract has commercial substance; and it is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected.



2) Identify the performance obligations in the contract.

Usually, operational systems represent the Performance Obligations in the contract but there are two possible exceptions:

- Several Operational Items representing the same Performance Obligation. For instance, in a Desktop Computer (represented by a Sales BOM), several Items are detailed in the Sales Order (Monitor, CPU and Keyboard) but they represent the same Performance Obligation of delivering the Computer.

- One Operational Item representing several Performance Obligations. For instance some Computer Manufacturers offer one year technical support service (Performance Obligation) with every computer sold (Performance Obligation).



3) Determining the Transaction Price.

The transaction price is the amount that the vendor expects to receive in exchange for the goods or services.



4) Allocating the Transaction Price to performance obligations.

Once the transaction price for the contract has been determined, IFRS 15 requires to allocate it to the performance obligations of the Contract. Considering the two cases above, in which the Operational System Items does not represent univocally the Performance Obligations, we can understand the challenge of allocating the Transaction Price to the Performance Obligations.



First, IFRS 15 requires to determine the Stand-Alone Selling Price which is the price that the vendor expects to receive in exchange for delivering the goods or services of the performance obligation are sold separately to a customer. Be aware of the difficulty of estimating the Stand-Alone Selling Price when several performance obligations are sold together with a bundle price.

In order of determining the Stand-Alone Selling Price, IFRS 15 permits three approaches.

1. Adjusted Market Assessment. Estimating the Stand-Alone Selling Price according to the conditions of an specific market, reflecting the vendor costs and margins.

2. Expected cost plus margin. Estimating the Stand-Alone Selling Price according to the expected costs of the performance obligation for the vendor, plus its correspondent margin.

3. Residual Method. In case of bundle prices for grouped performance obligations, in which we can not estimate the Stand-Alone Selling Price of all the performance obligations, IFRS 15 proposes the following two-steps approach.

First we have to estimate the Stand-Alone Selling Price of the performance obligations of the group, that can be estimated with one of the previous approaches. The we will estimate the Stand-Alone Selling Prices of the rest of the performance obligations, by deducting the Stand-Alone Selling Price of the performance obligations already estimated, from the total contract price of the group of performance obligations.



5) Recognize revenue when each performance obligation is satisfied.

In case of a good or service delivered in one step, the performance obligation is satisfied at the moment of the final delivery to the customer, but in case of services or goods delivered during a period of time, IFRS 15 requires that the revenue is recognized according to the percentage of the performance obligation that has been delivered in every financial period.



Although, IFRS 15 impacts other industries much more than Banking (which is much more impacted by IFRS 9), there are some banking services impacted by the requirements of IFRS 15.

Fulfilling IFRS 15 requirements, requires Information Systems with strong sub-ledger capabilities, that we described briefly in a previous blog.



http://sapbank.blogspot.com/2016/02/fulfilling-ifrs-9-and-ifrs-15-sub.html



Additionally, SAP provides the Revenue Accounting and Reporting module for IFRS 15, which supports all the requirements of the 5 steps approach for Revenue Recognition described above.

We have worked recently in the design of an IT architecture, combining Bank Analyzer and SAP Revenue Accounting and Reporting for IFRS 15, for supporting IFRS 15 requirements in Banking.

I’ll give you some details in a future blog.

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