SAP Impairment Accounting Extension for Expected Losses
The SAP impairment accounting extension for expected losses allows you to handle impairment based on the expected loss model. It is one of the best solutions for IFRS9 implementation. It covers the shift in accounting from the incurred loss model to the recognition of expected loss.
IFRS9 primarily addresses the following topics:
- Classification and Measurement
- Impairment Accounting
- Hedge Accounting
SAP Extension for impairment Accounting provides the solution for step 2. (Impairment Accounting). It helps in recording forward-looking information for the financial instruments classified as Amortized cost (AC) or Fair Value through comprehensive income (FVTOCI).
As per IFRS9, all financial instruments are assigned to stages reflecting the credit risk.
Relates to the risk from default events with no significant increase in credit risk. All the new purchases are recorded in Stage 1. Expected credit loss (ECL) in stage 1 is calculated using the 12-month Probability of default.
If the credit risk increases significantly and then the financial instruments are transferred to stage 2. In this stage, ECL for a financial instrument is calculated based on lifetime Probability of default.
Financial instruments are transferred to stage 3 if there is an increase in credit risk possibility of the write-off. In Stage 3, ECL is calculated using the lifetime probability of default.
There is a standard process in SAP for stage transfer functionality.
It is possible to handle contract modifications that require the realization of gains or losses according to IFRS9 changes. SAP has enabled the standard reports with the key figures as per IFRS9 standards
The following diagram shows the stage concept and the impact on different key figures.