Make Your Bad Debt Reporting Accurate and IFRS Compliant

  • by Kees van Westerop, Senior SAP Consultant, Kwest Consulting
  • April 12, 2011
When a financial statement (e.g., balance sheet) is being prepared according to International Financial Reporting Standards (IFRS), the outstanding receivables should be fair valued. This means that the reported amount should reflect the expected amount to be received. Learn about a functionality SAP developed that allows you to make a fair value adjustment in your system so that your financial statements will be correct.
Key Concept
For the fair value adjustment, SAP developed valuations for the flat-rate individual value adjustment. These allow you to automatically calculate and post a flat-rate amount as a correction for the outstanding receivables. The amount depends on the number of days the receivables are overdue. The posting corrects the balance sheet and the profit and loss statement (P&L). The outstanding amounts per customer are not modified.

A certain percentage of outstanding receivables will not be received. To accurately reflect the amount that is likely not to be received, an allowance for doubtful debts is created and recorded on the balance sheet. This amount reduces the receivables balance. You define a percentage of the outstanding receivables as bad debt. The percentage depends on the number of days the amount is overdue. In the example in this article I use the following percentages:

  • For receivables overdue from 60 to 90 days a provision of 3 percent is calculated
  • For receivables overdue from 91 to 120 days a provision of 25 percent is calculated
  • For receivables overdue from more than 120 days a provision of 100 percent is calculated

Before calculating and posting the provision, you need to configure the SAP system and change the customer master data. First I’ll explain how the configuration and master data is set up and then go through the business process.

Note
My example is from an SAP ERP Central Component (SAP ECC) 6.0 system, but it works in earlier releases as well.

Kees van Westerop

Kees van Westerop has been working as an SAP consultant for more than 25 years. He has an MBA degree in mathematics and a degree in finance. Kees has been concentrating on the financial modules, especially in general ledger accounting, cost center accounting, and consolidation. He also has a great deal of experience with rollouts of kernel systems and integrating finance and logistics.

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Comments

5/8/2013 9:52:44 AM
Julio Quintana

What is the impact of using this solution to provision on a monthly bases. does the calculation adjust the provision for previously adjusted invoices. Or do you have to reverse the preivous months adjustment, and then run it for the current month.
julio.quintana@ey.com

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