Posting Credit-Risk-Based Impairment

The use of the Credit-Risk-Based Impairment under Advanced Valuation ensures that businesses are effectively measuring and managing their credit risk while complying with International Financial Reporting Standard 9 (IFRS 9) regulations, improving credibility and minimizing potential business losses.

The key components of Credit-Risk-Based Impairment includes:

• Credit Rating: The system allows for the assessment of a customer's credit rating, which represents the estimated ability of a customer to meet financial commitments.
• Risk Classification: This involves classifying as per the risk involved like low, moderate, and high risk.
• Credit Risk Models: Calculates Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD). These are then used as elements to calculate Expected Credit Loss (ECL).
• Impairment Calculation: Based on ECL calculation, an impairment figure is generated which is a measure of credit loss risk that needs to be mentioned in the financial statements.
• Reporting: The system allows for regular and ad-hoc reporting of risk details and impairment values.

The template Post Credit-Risk-Based Impairment 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. It posts the results as impairment losses or creates posting proposals for impairment for the creation of your financial statements.

Before you can execute the job for the credit-risk-based impairment, you must make individual settings in the customizing to ensure that the configuration meets your requirements.

The following video explains the key steps in the configuration and demonstrates a credit-risk-based impairment run in the SAP system.

For each country/region you can define if the calculation of the impairment is based on the net or gross amount of the receivable.

An impairment rule governs the entire process of credit-risk-based impairments. SAP provides the rule SCRI for credit-risk-based impairments.

The Aging IMPAIRMENT is assigned to the valuation rule step for the impairment of receivables. An aging comprises one or more aging increments. An aging increment is used to rate for how long a receivable is overdue. Together with the risk class, you determine the probability of default in percent.

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 profit and loss account.

The loss allowance is calculated using a formula:

The risk class is assigned in the business partner master record.

By using semantic tags to tag accounts and account ranges in the financial statement version, you don´t have to select accounts manually in the configuration. When you've assigned a tag to a valuation rule, the tagged accounts are considered by the valuation job. If new accounts are created within a range that you've already tagged, these new accounts are automatically tagged and thus selected.

You only have to set up profit and loss G/L accounts as the postings are always made to the account to be valuated.

For the selection of G/L accounts by using semantic tags, the corresponding financial statement version must be assigned to its accounting principle. You can find this setting in customizing under Financial Accounting → General Ledger Accounting → G/L Accounts → Financial Statement Versions → Assign Financial Statement Versions to Accounting Principles.

You can also use and change the delivered rules and settings for credit-risk based impairments.