SAP Treasury and Risk Management: Fixed Term Deposit Instrument

Content

The Theory

1. Introduction to Fixed Term Deposit

2. Client Requirement

SAP System Configuration and Testing

1. Transaction Management

2. Organization

3. Accounting

4. Position Management

5. Transaction Workflow Configuration

6. End User Testing

7. General Data: Payment Transaction

8. Company Code Data

9. Deal Creation

10. Understanding the Interest Calculation Method

11. Deal Release

12. Deal Change or Settlement

13. Post Flows

14. Display Accounting Entry and Payment Key

15. Post Automatic Payment

16. Month End Activity: Post Accrual or Deferrals

THE THEORY

Introduction to Fixed Term Deposit

Fixed Term Deposit is also called Term Deposit. It’s a Money Market Instrument between a counter party (usually a financial institution) and an Investor, in which the Investor agrees to deposit an amount of money over a given period. The investor cannot withdraw the amount deposited before the maturity date without paying a penalty fee. The money in a term deposit is locked-in for specified period. In periods of rising interest rates, investors are more likely to enter into a fixed term deposit agreement since the interest earning is expected to be high. Investors are also more likely to enter into a fixed term deposit agreement when they have excess cash. The interest earned on a fixed term deposit increases as the time to maturity increases. Once a firm enters into a fixed term deposit agreement that earns monthly interest, the interest must be accrued every month end until maturity.

Assumed Client Requirement

Energy Company is a PLC company that supplies solar power inverters and batteries. The company is experiencing a boom and lots of excess cash in its bank account. The company has therefore decided to lock its excess cash fund for some months. The company has approached HSBC Counter party and agreed on a monthly interest rate of 5% for the term deposit amount of N2,000,000. Energy Company uses SAP S4HANA 2020 and has approached you to set up the fixed term deposit configuration on SAP to account for this investment in its GL. In addition, the client wants a workflow to be configured such that a junior treasury officer in the front office creates the deal, and a manager approves the Fixed Term Deposit Deal. The firm has also informed you that it only invests in fixed term deposit, but do not borrow. Beyond the principal and interest related flows, the company has other flows that impacts the cashflow such as WHT, Commission and Charges.

SAP SYSTEM CONFIGURATION

Transaction Management

1. Product Type

Product types help to differentiate between different Money Market financial instruments. Differentiation is necessary if the individual instruments are subject to different processing rules or if you wish to create different levels for evaluation. By assigning different structure characteristics, various forms of transactions can be predefined. Examples of SAP default product types are: (a) 510 Fixed-Term Deposits, (b) 520 Deposits at Notice, (c) 530 Commercial Paper. In this example we created a product type FTD with category 510. Interest Calculation Method We will use a day count of ACT/360. This is the actual number of days in the period divided by 360 days in a year.

For Fixed term deposit, we will not use an effective interest calculation and calculation type. We typically use this for bonds whose interests’ compounds. Facility This is basically an agreement between the lender and borrower on the limit of drawings against a credit line. The two main categories are: Bilateral and Syndicate. A Bilateral Facility has only one line of credit and is an agreement between 1 lender and 1 borrower. A syndicate facility has multiple line of credit because its an agreement between 1 lender and many borrowers. We would ignore this tab for fixed term deposit.

2. Define Number Range and Transaction Type

According to our client’s requirement, it only invests in fixed term deposit but do not borrow. In this case, the scope of our transaction will only be investing (not borrowing). If you have a client that invests and borrows Fixed Term Deposit, in that case, you will need to create both investment and borrowing transaction type. These are the fields that are necessary for fixed term deposits. The Transaction type for investing in SAP is 100 and the transaction category is to buy(Invest) a fixed term deposit.

• Number Range: Notice that in the previous step we had defined number ranges. In this step, we assign a number range to the transaction type. The above implies that for every fixed term deposit created, the document number will be automatically generated by the system as a number between 0100000000.. – 01999999999...

• Processing Tab: Processing Categories: In this field, we can define the processing steps for a transaction. This controls the status of a trade. In our case, we will choose with settlement, as approvals will be required to settle the cashflows of the trade.

• Automatic Posting release: If this is checked, when we create a trade, there will be a lock icon on the cashflows preventing postings to the ledger until settlement is performed.

• Automatic Settlement for Counter confirmation(optional): If correspondence is configured, a trade can be automatically settled once the correspondence is received. You must set the indicator on if you wish to settle trade using the new sap correspondence.

3. Flow Type

In this step, we will define the flows type and assign the relevant flows type to the transaction type and product type. The flows type definition is a crucial step to generate the cashflows of the transaction. According to the requirement, the necessary flows types are:

• Principal Increase (1100)

• Final Repayment (1120)

• Interest Capitalization (1150)

• Nominal Interest (1200)

• Charges (1900)

• Commission (1901)

• Withholding Tax 1 (1905)

• Interest Income Tax (5000)

Please note that if you want want to use automatic payment request in TRM, you must make changes in the payment request section of the relevant flow type.

You can also define additional flows type based on client requirements.

The Next step is to assign the flows type to the product type and transaction type as shown below:

Derived Flows: These are flows that are dependent on other cashflows. In our case, the Withholding tax flow (1905) is a derived flow from the nominal interest flow (1200). The WHT rate of 10% will be calculated based on the nominal interest income. We therefore need to configure the system to automatically calculate the 10% WHT on every nominal interest.

Condition Types

The Condition Types are generated from the flows type based on certain SAP calculation types. It is advised to use the SAP predefined conditions. In our case, we will create a condition type for

1. Final repayment

2. Nominal interest

3. Interest capitalization

Organization

Define Portfolio

A client may hold one portfolio for all financial instruments or hold multiple portfolios. The Definition of portfolios is per company code. You use the portfolios as an organizational element to group various financial transactions for reporting purposes. According to SAP, you can use portfolio for risk management analysis. In our case, the client has a single portfolio for all money market investments.

Define Trader

The Trader is the person with whom you perform the trade. This is unnecessary as we do not plan to make postings using a trader. If however you client requires the configuration of a trader, you will need to give the trader the authorization to deal with Fixed term deposits.

Define Field Selections

In this step, we make certain fields compulsory when a user at the front office want to enter a trade. In our case, the client requires that the portfolio field be made compulsory for a combination of product type and company code.

Accounting

Define Valuation Area

In our case, the valuation area will be IFRS standard for accounting. The Operational Valuation area is 001 for the IFRS accounting principle any other country or group specific valuation is derived from this valuation area. It is possible to perform parallel valuation for multiple valuation areas.

Define Accounting Code for the Company Code.

The relationship is a 1:1 relationship with the company code. This is the accounting code that will use the valuation area. A direct assignment of valuation area to company code is not possible in SAP, therefore, SAP created an accounting code that is assigned to a company code and valuation area.

Assign Accounting Code to Valuation area

In our case, we would allow the valuation area to post to finance. And we specify the accounting principle in use in financial accounting. By default, valuation area 001 is the paying valuation area. However, if there is a different paying valuation area, that can be assigned separately.

In our case, we do not have a different paying valuation area.

Assign Update Type for Accrual and Deferral

This step is very important if the end-user wants to calculate accrued interests and deferrals.

Make sure the product group 3 is selected

Select update type and ensure the assigned update type includes MM1200+ for investment increase.

Define Account Assignment Reference

I will show you how to define an account assignment reference. Otherwise, you can use SAP standard Account assignment reference.

Determine Account Assignment Reference Determination for OTC.

In this step we will create the derivation rule for the account assignment reference

Next is to run a test before assigning GL or creating symbols. This test will show you the Account assignment reference that SAP will pick up when end users make postings. This is important to avoid errors.

Enter the information and click test.

Link to other Accounting Component

In this step we will assign the GL that will be used for posting the transactions into finance.

Accounting Symbol Definition

We would leverage the SAP provided accounting symbol, create the relevant GL accounts, and assign the GL to the accounting symbols.

The SAP delivered symbols are: 1, 3, 4.1.1, 4.1.2, 4.1.3, 4.6.1

Define Posting Specification

We must assign all the accounting symbol to the created GL accounts to ensure proper reporting of the transaction. Symbol 1 and the below symbols have been configured.

If the Client wishes to calculate Accruals and Deferrals on Fixed Term deposits, the following additional accounting symbols must be assigned to a GL.

Position Management

Define and Assign Valuation Class

There is a difference between the general valuation class, valuation class and valuation area.

• General Valuation class: this just an identifier for classifying the type of investment. It has no impact on the position of the transaction or its valuation. In our case, The General Valuation for our Fixed Term deposits is Short Term Investments, Mid Term and Long term

• Valuation Class: for the valuation area 001, we would create 3 valuation class according to IFRS 9 requirement for Investments held at fair value through profit or loss, Available for Sale and held to maturity.

We would assign the general valuation class to specific valuation class

Assign Position Management Procedure

In our case, we would assign a Mark to Market position management procedure.

Assign General Valuation Class – MM transaction

In this step, we will assign the general valuation class to combination of product type, transaction type and company code.

Transaction Workflow Configuration

We will not be building a new workflow from scratch in this document. We will only be adjusting the SAP predelivery workflow template.

Define Release Procedure

The first step is to define release procedure for a combination of the company code, product type and transaction type. Check release procedure as required.

Next step is to define the release condition as shown below: There are many categories of activities that we can set up a workflow for, but for this illustration, we will set up the workflow for the activity category of contract (10). The specific activity is 01(Create) and 02(Change). We will also set release is required. We can set the transaction processing Key as 1 or 2. If this is set as 2, the system will bypass the workflow, if set as 1 or blank, the system will prevent same person from creating and settling the deal.

Adjust/Copy Workflow Template

Define Standard Role

Create the responsibility by clicking new entry. In the case below, the responsibility is restricted to company code 100P, current approval level is 1 and the release approval level is 1. In the case below, the approver can only approve a transaction type 100 for a product type FTD in company code 100P. It is possible set up to 3 approval levels, however for illustration we will just set only 1 approver.

Approver 1: Current Approval Level 1.

Insert Agent Assignment to include the approver. Using the icon insert

The Agent assignment can be a person, position, job etc. for our case, we would use a USER, because the HCM configuration is not functional. In a full-blown implementation where HCM is fully configured, it is more likely that Position will be used as the agent assignment.

Select the user and press enter. The user is now assigned as the approver.

Note: that the approver configured on this screen is not necessarily configured to receive email. In other to configure a user to receive email on the SAP default workflow template: 20000139, we need to adjust the workflow and include the user.

Transaction release: Adjust workflow

Just get the name of the task group on this screen as shown below.

Assign Approver to a Task on the Task Group.

This is the most Important step to enable a user see a deal in his/her inbox app. To configure this, we can use the Tcode: TJ08 or file path below:

The above transaction code will show us the work item overview screen below for items that are in process, or those awaiting approvers.

I will double tap on deal 100….9 to create an agent assignment for approval.

Next I will click Agents and then on the next screen below, I will click overall view

I will double tap on TRTMTR: Transaction release to open the tasks. The following Task below now appears.

It’s on this screen we assign the approvers for the various task in the workflow. We can assign and unassign users on this screen. We have assigned the following Approvers for the following Tasks:

End User Testing

The scope of this document does not cover the counter party business partner set up for TRM. However, we require a counter party business partner to create the deal. In our case, we have created HSBC Bank as a counter party. The following checks are required to ensure that we can use the business partner.

The Key Prerequisite are:

• Business Partner configuration

• Bank Master Configuration

General Data: Payment Transaction

The above bank account is the bank accounts that holds the transaction funds. It is created if funds need to be transferred from another bank account using the payment program. The bank accounts are two separate bank accounts in the same house bank.

Company Code Data

SI: Authorizations

In this Tab, we would check a standing instruction for fixed term deposit. This implies that it is now possible to create fixed term deposit deals with this counter party.

SI: Payment Details

If the business partner is not a bank, then we need to maintain the payer/payee field with the business partner number. The result is that payment is transferred to the business partner using the automatic payment program.

Select each line and click assign. We would Assign the Incoming Bank account as ACCS and the outgoing as ZNTH.

SI: Derived Flows

This is where we assign the WHT 10% derived flows we configured.

Deal Creation

To test the configuration, we would create a fixed term deposit of 2m Nigerian Naira at 5% interest rate using the Tcode: FTR_CREATE, With an agreed monthly frequency of interest payments.

• Structure Tab

The start date of the trade and the contract date must be the same.

Notice that based on the factory calendar assigned in configuration, the system compares the start date and end date of the trade to know if it’s a public holiday. If it is a public holiday, the system prompts you that the settlement date is a public holiday. In our case, we will change the end date.

• Administration Tab

Notice that the general valuation class is automatically picked up by the system, because we have assigned this valuation class to the product type and transaction type

• Other Flows

The available other flows type are as follows:

• Payment Detail Tab

The system automatically picks up the Payment Details we entered in the business Partner master record. We can enter a Valid From and the flows type that uses a particular bank account. In the case below, all outgoing payment will use the zenith Bank, while all incoming will be processed by the access bank.

• Cashflow Tab

Notice that the Icons are locked, because in configuration we specified that settlement is required. The other flows are shows below in the cashflow as specified. The Witholding tax is automatically calculated by the system as 10% of every nominal interest till maturity of the instrument. The direction(-) tells us its an outflow while (+) means inflow

Understanding the Interest Calculation Method

You can double tap on any cashflow to see details of its calculation method. For example, nominal interest is calculated using a linear method.

Nominal Interest = Base Amount Number of daysrate/ No. Base Day

= 2million 310.05/360 = 8611.11

In months where the number of days is 30, the system will use 30days. On the date of the final repayment, the number of days is only 28 days, therefore the system calculates the last nominal interest using 28 days.

Status Tab

The release status shows that release is required for this fixed term deposit.

Click Save and a document number will be generated.

Deal Release

Recall that we have configured a workflow, therefore the individual that creates the deal cannot approve(release) the deal. In our case, the user OUTAZI has created the deal, therefore the same user release settle the deal. If the same user tries to settle the deal, the following error will pop up:

Now we must log-in with the other users to approve this deal. Do not confuse deal release with deal settlement. Just because a deal has been released, doesn’t mean it has been settled. After release, we can now settle the deal by making an attachment.

Approver 1: VADEBAYO

In the image below I have logged in with the user: VADEBO, and I will check my inbox app for the deal created by OUTAZI

I click on show log, then view the trade. Once you go back, the system asks you to accept or reject or cancel the deal.

We can choose to just go ahead and release the deal, reserve the deal, forward the deal to another approver, open task or show log. If you click Claim, the task will be reserved. Click approve If all is fine.

Notice that after VADEBAYO approves the transaction, the transaction leaves her inbox. And the total number of inbox item is now reduced to 17 from 16.

Deal Change or Settlement

Settlement

Now OUTAZI can change the deal or settle the deal by attaching a file.

Post Flows:

It's in this step that we post to accounting.

Use Tcode: TBB1 and select Money Market

Click Postings to see the Postings

Notice that Only Investment Increase, Commission and Charges are posted on the date of the transactions. The clearing account is credited while the commission, charges and principal GL are debited. The nominal interest will be posted as a month end activity.

Click Payment Log to see the Log

The system automatically picked up the bank account that the fixed deposit will be paid to from the partner master data. The payment request GL 200 is also picked up.

Now we can uncheck test run and perform actual posting of the Fixed Term deposit and all related charges to the counter party.

Display Accounting Entry and Payment Key

We need to know the payment key so that we can use it when posting automatic payments. We use the Tcode TPM20 to check the accounting entry and payment key.

Notice that the clearing account is credited. When we post the payment in the next step, the clearing account will be debited and the bank account credited.

Post Automatic Payment

You can use the T-Code F111 to post automatic payment.

Maintain Parameters

Enter the ID and Run date then click on Parameter

Select dynamic selection:

input the payment key and save

Select Additional Log

Save the Parameter

Maintain Proposal:

Note: in addition to FBZP configuration, ensure that the following configuration are complete before creating a proposal otherwise the system will not pick up a valid house bank for bank transfer payment method.

Edit the Proposal to check for errors:

Start immediately and click ok.

Check the proposal to see the house bank and account ID

Payment Run

Get the Document Number by clicking on Payments

Display Document

Use Tcode FB03 Our Bank Account is Credited and the Clearing Account Debited

View Position of Trade

We can view our position for the trade using the Tcode: TPM12

Not that your trade Position does not include the commission and charges expenses paid. This is the value of the investment on the Balance sheet.

Double tab to see details of flows. Charges and Commission are not relevant for position.

Month End Activity: Post Accrual or Deferrals

Every Month End, we use the Tcode: TPM44 to post the month end nominal interest. Typically, this is a month end activity, but In our case I will post the accrual today to calculate the accrued interest for the trade.

Notice that the system has calculated the accrued interest for 11 days. The trade was entered on the 27/12/2023. The first nominal interest was supposed to be due on the 26/01/2024, but I post the accrual after 11 days. The Accrual/Deferral Key Date I chose was 06/01/2024, notice the system is telling me that the nominal interest should be 8,611.11 if I wait till 26/01/2024.

View Position of Trade again

Now use TPM12 to view the Trade position again double tap and see the subledger cashflows

G/L Line Item

The GL line Item shows the amount than will appear in financial statement.