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SAP Financial product subledger overview

Hello Guys,

Hope you are doing well and keeping safe. There has been some time since I wrote a blog, and I thought of picking up the solution offering of SAP for Financial services and the Financial services product sub ledger product.

Overview

What is Finance sub-ledger of SAP

SAP FPSL or Financial Product Sub-ledger is SAP’s solution to support various Financial services organization to manage finance products as separate sub-ledger and enable acquiring instant financial insight at any level of detail for analytics and reporting. SAP FPSL is also dedicated multi-GAAP and multi-entity sub-ledger.

The product came into existence in first quarter of 2019 as part of co innovation project between SAP and Swiss Re. Previously SAP had a product Bank analyzer and Insurance analyzer for the FSI space.

Why do we need one?

Financial reporting for FS industry has seen lot of changes in last few years and the complexity will increase. The some of the key regulations (but not limited to) which FS industry must deal with are :-

Regulation Scope
IFRS 9 Scope for the financial instruments and investments
IFRS 15 Revenue recognition
IFRS 17 Accounting for Insurance contract
US GAAP LDTI or Long Duration Targeted Improvements Insurance related contract

 

To comply with the above regulations any organization will need to have system and processes to be able to comply with these regulatory requirements. Having a detailed product subledger allows to manage the complexity and required data parameters within the subledger and allow for an easier adoption of the standard.

SAP FPSL comes with two flavors:-

  • SAP S/4HANA for financial products sub-ledger, Banking option which is shipped with pre-configuration and templates for IFRS 9 and US GAAP
  • SAP S/4HANA for financial products subledger, Insurance option which is shipped with pre-configuration and template for IFRS 17 and US GAAP LDTI regulation.

What is its architecture

SAP FPSL is installed as an add-on on top of S/4HANA and links to S/4HANA General ledger. SAP FPSL can also be used standalone with any other ledger e.g. Oracle Financials or Peoplesoft GL.

Below is a representation of the SAP’s architecture to support the Financial services industry with Focus on Banks. The source transaction layer can be replaced with Actuarial and claims related systems for the Insurance based scenario.

Solution%20architecture

Solution architecture

Salient point about key components:-

Sno. Architecture layer Key details
1 Transaction system / TP system This represent the source systems which records the trade / front office transactions. These can be SAP’s own system or third-party system present with Financial service These system records the transactions
2 SAP FSDP / Financial services data platform (Data layer)

SAP FSDP is the underlying data layer which can be used as a data service layer to support the subledger. FSDP will receive data from various TP system and this data will be then used for the subledger processing.

Some of the example of data can be Counter party, Cash Flow, Business transactions, IFRS 9 credit related parameters e.g. probability of default etc.

3 SAP FPSL/ Financial product subledger

From the above diagram you would view the 3 key components of FPSL process are:-

1)      Source data layer- This is layer where you stage data for Subledger processing.

2)      Accounting rules- This reads the data and post the subledger posting

3)      Result data layer-This layer stores the values from subledger posting and certain data from FSDM

4 S/4HANA Core

S/4HANA provides the general ledger layer which can support the organization finances including various subledger like Fixed asset, Accounts Payables etc. The Financial product also becomes a subledger for S/4HANA.

There is drill down facility ( to be enabled) which allows drill through for the ledger to the sub ledger postings and ease reconciliation.

5 Additional components

There are additional components which can also be used but the use case is optional in some cases.

These can be group reporting ( for enterprise consolidation), SAP Analytical cloud ( for reporting and is highly recommended to be used along side FPSL for both bank & insurance scenario)

 

How does this work in real world?

Let’s take an example scenario to illustrate the above flow. For simplicity sake we will consider a loan product. Below is a short representation of different data points needed for the subledger processing:-

Financial%20product%20system%20landscape

Financial product system landscape

For our example we will consider an entity (bank for simplicity sake) which needs to follow IFRS and US GAAP. It issues a loan is issued to a customer and disburse the loan to customer. We will assume no upfront fees and ignore the FX and Currency position related processes. We want to see the simple debit and credit flow through and recognize the disbursement transaction. We will cover each of the steps in more details in further blogs.

Within SAP FSDM there is a data model for the Loan which we will refer, and we will use certain components within our demo. The details will be explored in further blogs.

Loan%20table%20schema%20in%20SAP%20FSDM

Loan table schema in SAP FSDM

The entity in question which issues the loan has EUR as its functional currency. The loan is recorded in a trading platform (Mysis / Finastra) for this example. There is a transaction in TP system which is disbursement of the loan and we want to make sure that this data flows in SAP FPSL and SAP S/4HANA General ledger.

Loan%20transaction%20captured%20in%20Trading%20platform

Loan transaction captured in Trading platform

The TP system will record the various events and may or may not record the financial postings (some  TP system will have their own ledger system). An additional point to note is that the accounting system in SAP FPSL is event based i.e. it would require a feed of events e.g. disbursement of loan etc. to be fed to the FPSL layer (more on this in later blogs).

There can be other source system e.g. Customer master data / counter party KYC system etc.

The TP system can be linked to SAP FSDM (Data layer) via smart data access mechanism. There can also be a file based.

Data is moved from staging layers within FSDM and through process chain is moved to FPSL layer. There are multiple steps and setting involved, but the high-level result is :-

  • Setup of Loan contract in FPSL system:-

A loan contract is setup in the subledger from the TP system data.

Loan%20contract%20setup

Loan contract setup

Certain key parameters e.g. limits can also be configured and recorded.

  • Information relating to counter party e.g. rating etc.- This information is also used to create business partner and to link the contract to BP.
  • Business transactions , Cash flow and other details- In this example we loaded a simple disbursement transaction for loan and there were no upfront fees involved.

Sub%20ledger%20posting

Sub ledger posting with coding block elements

We view the 4 disbursement lines for the subledger ( for the 2 accounting standards).

Additionally, subledger posting are posted to S/4HANA Ledger.

Ledger%20posting%20at%20a%20summary%20level

Ledger posting at a summary level

Sub ledger posting

This provides a high-level overview, a more lay of land as to how the SAP Financial product subledger works and links various components. The above scenario is applicable for the banks , but the flow is similar for the Insurance client ( using FPSL for IFRS 17 reporting). There are additional set of features to support the IFRS 17 related requirements.

Summary

The objective of this blog was to just provide an initial overview and a bird’s eye view of the setup. This was also to ensure the further blogs which explore the topics in more details can be better understood when one has a view of overall solution. Again, since the use case of financial products (IFRS 9) vs Insurance contracts (IFRS 17) are quite different it would be better to cover them in separately. I hope you find this useful and would love to know your feedback. Additionally, if you have any questions feel free to drop a comment or reach out to us.

Regards and keep safe.

Rishab Bucha

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