Name: Understanding Credit Risk Based Impairment in SAP S/4HANA Cloud - Finance
Uploaded: 2022-9-1
Duration: 600 s
Description: In this Microlearning you will learn the following:- Understand motivation behind introducing Credit Risk Based Impairment- How to process Credit Risk Based Impairment in SAP S/4HANA Cloud - Realize key benefits when using Credit Risk Based Impairment

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<div>In this Microlearning you will learn the following:- Understand motivation behind introducing Credit Risk Based Impairment- How to process Credit Risk Based Impairment in SAP S/4HANA Cloud - Realize key benefits when using Credit Risk Based Impairment</div>

Understanding Credit Risk Based Impairment in SAP S/4HANA Cloud - Finance

Hello and welcome to this microlearning on understanding Credit Risk-Based Impairments for SAP S/4HANA Cloud for Finance. My name is Hrvoje  Rihtaric and I am Principal Business Consultant in the SAP S/4HANA Cloud EMEA team. In this video, I will introduce process of Credit Risk-Based Impairments based on the Advanced Valuations. We will cover  following parts. First, I will provide a general overview of Advanced Valuations with a reference to Credit Risk-Based Impairments and explain main principles behind it. Next, we will investigate process and process requirements in SAP S/4HANA Cloud as an introduction to our next point, which is presentation in the SAP S/4HANA Cloud System. As a summary, we will reflect on the key benefits gained through using Credit Risk-Based Impairment. International Financial Reporting Standard nine, Expected Credit Loss introduces the requirement for companies to account expected credit losses from contractual relationships with business partners based on the current and future economic circumstances. In SAP S/4HANA Cloud, Expected Credit Losses of trade receivables are calculated based on the provision matrix where we apply fixed provision rates depending on the assessed risk category of a business partner and aging increment represented through number of days open items of trading partner are overdue. Credit Risk Based Impairments  are offered as an integrated part of Advanced Valuation Capability  offered to GL accountant. In SAP S/4HANA Cloud we use single entry point an App Schedule General Ledger Jobs  to initiate the process. As you can see, our process consists of various parts, master data or prerequisites, transactional data, and the execution of the credit risk based impairment in the SAP S/4HANA Cloud system. As a first step, credit risk manager will perform assessment of the business partner in coordination with colleagues from accounts receivable department. Based on the predefined criteria like country of origin, rating, payment behavior, dunning history, credit risk manager will assign appropriate risk class. Of course, this process can also be performed automatically by applying calculation rules. In the next step, we as a company, enter into a contractual relationship with a business partner in form of issuing invoices for delivered goods and provided services. Those invoices are issued with due dates where we expect the customer pays the outstanding amount to us. It could happen that amount is also outstanding after calculated due date and this will make open item overdue. Such item will be taken into account for Credit Risk-Based Impairment. In the last step as a part of period and closing process, general ledger accountant will schedule the job for calculation and posting of credit risk. Here, system will check number of days open items on customer accounts are overdue. This will be compared with the configuration settings for aging increments and open item will be placed in the appropriate range. System will also retrieve credit risk class from business partner master record and use it to derive probability of the default represented as an estimate of likelihood that the receivable will be defaulted. This derivation is performed based on the aging increment and risk category of a business partner. As a last step probability of the default percentage of expected default will be used to calculate loss allowance which will be posted in the system. Now, let's take a closer look on how this process looks from the accounting perspective. In our scenario, we have a business partner with assigned risk class as a medium default risk defined as a risk class C. This business partner has opened item in amount of 100 thousand Euro, which is overdue for 45 days. Based on the configuration settings, system will retrieve probability of the default as 15 per cent. As we see initially open item in amount of 100 thousand Euro is posted on the reconciliation account for trade receivables. Based on the result of Credit Risk-Based Impairment process, credit loss allowances is calculated in amount of 15 thousand Euro. This amount is the result of multiplying open item with probability of the default. Credit loss allowance is posted on the P&L account for flat rate value adjustments, which we define in configuration for credit risk based impairment rules. As you have noticed, offsetting account to this posting is original reconciliation account. With Advanced Valuations, it is possible to post on the reconciliation accounts. Now, let's review the process in our SAP S/4HANA Cloud system. As a first step, I will use App Manage Credit Accounts to check credit risk class of my business partner. As you can see, this business partner has risk class C, medium default risk defined in his credit risk account. Credit risk class is defined in App Manage Business Partner for the role SAP credit management or UKM zero, zero, zero. Next, I'm reviewing open items of our customer in an App Manage Customer Line Items. As you can see, our customer has one item in amount of 100 thousand Euros. This open item was due on the 20th of April 2022, and it has already 71 days of arrears. Based on this, we can expect that this open item will be picked by Post Credit Risk-Based Impairment job. Now in the next step,I will process my Credit Risk-Based Impairment through an App Schedule General Ledger Jobs. Here I will create the job by using template Post Credit Risk-Based Impairment. In the next step, I will define when should the process be scheduled. For the demo purposes, I will define it in a way that it will be scheduled immediately,  but I can also schedule when the job can be started and define  the recurrence pattern. As the last step I'm defining parameters such as company code, ledger, key date and update or test run. Now I will schedule the job and wait for the results. Now my Credit Risk-Based Impairment job is ready and I will check the results. The result of Credit Risk-Based Impairment run consists of header information for the valuation run, the calculated results for company code and functional currency and log information. Error message or information for the end-user can be found in the job-log. Posting details will be opened by clicking the icon under column Type. Let me check the result details for the company code  currency. Here I can see the result of the impairment run and I'm interested in this financial document. If you recall, this is same document that we analyzed in App Customer Line Items. Now let's review the results by analyzing most important fields. Field status detail describes the details status of processing. each journal line entry and value posted indicates the document is successfully processed and changes are posted. Field calculation allowance calculates loss allowances based on the open amount of line item and probability of the default. Field Delta allowance is the difference between the calculated loss allowance and the amounts  already posted on P&L account. Field Valuation  line type specifies which kind of impairment change is done during the valuation run. Now, let's review results of our impairment run in financial accounting. For this suitable App would be Analyze Credit Loss Allowances. This is analytics App where we can check our credit loss allowances postings based on different variation line types. Here we can enter selection criteria such as Key Figure Layout, ledger, company code, fiscal year variant, period, and currency type. As a result, we will see an overview of Credit Risk Based Impairment relevant postings based on the different situation type, for example, a new valuation, utilization, FX effect, et cetera. In our case, we have only initial valuation or 15 thousand Euro, which is credit risk loss posted during Post Credit Risk-Based Impairment process.  After seeing the process in the system let's review its benefits. First, simplicity in account determination as we need to set up only general ledger accounts for posting credit risk-based impairment loss offsetting postings will be done to original general ledger account, even though this is reconciliation account. Next, simplicity in process execution through one App Schedule General Ledger Jobs and dedicated template. Any changes to previous valuation run are captured as a delta posting, same as life-cycle of open items such as partial cleanings, credit memos, or incoming payments. Also in case error was identified process can be restarted. And lastly, process transparency all postings are captured in relevant accounting principles depending on which one was activated for advanced valuation, as well as in different currencies, company code and functional currency. There is also a link between original and valuation document item as well as processing status per each item. Let's summarize the key learnings. You have understood the basic motivation behind introduction Credit risk based impairment. You have learned the details of Credit Risk-Based Impairment process in SAP S/4HANA Cloud and the key benefits around using Credit Risk-Based Impairments. For more knowledge on SAP S/4HANA Cloud, please check out other open SAP courses and learning journeys under respective websites. In case that you're interested in gaining information on how to configure Credit Risk-Based Impairments in SAP S/4HANA Cloud, please make sure to check related microlearnings and SAP Help documentation. Thank you and goodbye.