Hi colleagues,
A letter of credit, or a credit letter, is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility (financial assistance that is essentially a loan).
Perquisite
There is no perquisite for creation of Letter of Credit configuration, just activate Business Function if following SPRO path is not available.
Product type configuration is at client level, means applicable for all Company codes.
Any Configuration which is Category, These are defined by SAP.
A- Create Product type for Letter of Credit
The product type classifies a financial instrument in SAP Treasury and Risk Management. If we look at all the financial instruments, we see that they are very different in terms of their properties and features.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Product type>Define Product Type
Click on New Entries Button
In following screen we have to define
B- Create Transaction Type for Letter of Credit
The transaction type differentiates among the various transactions that we can trigger by means of a product type. For example Issue Letter of Credit and Receive Letter of Credit.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Transaction Type>Define Transaction Type
Click on New Entries Button
In following screen we have to define
Underlying Product type and Transaction Type are used to create import Bill. It’s a front end process where we create and automatic loan deal for payment of Letter of Credit.
In following screen we have to define
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Transaction Type>Define number Ranges
Enter Company code and click on interval button. We have to do this activity on Development, Quality and Production server.
This number range is used when we create a new deal, system auto assign next number available. In previous steps we had assigned this number range.
C- Create Flow Type for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Flow Types>Define Flow Type
Click on New Entries Button and Create Flow Types for Trade Finance
1100 and 1110 is for Contingent liability posting.
1204, 1205, 1206 and 1207 are for Interest conditions which shall be applicable if required.
1840, 1850 and 1860 are related to payments
1901 and 1905 are related to other flows
Flow Type: add code flow Type
Name: Description of Flow Type
Flow Category: Defined by SAP, Assign according to requirement
Relevant to posting: This Flow results in a Position change
Relevant to Position: This Flow determines whether posting records are created from a flow type or whether they should only use for statistical purpose
Relevant to Valuation: Flow to be incorporated into the valuation
Relevant to P/L: Flow related to an Expense or a Revenue
Rel, for Acc/Defer: The flow has to be Accrued/Deferred
Fee indicator: if the fee indicator is set, the flow type represent a fee
Payment request: should this flow generate a Payment request or not (Payment request is used in payment program Tcode: F111)
Individual payment: e.g Compensation or netting allowed for this flow type or not
After creating flows next step is to assign flow type to Transaction Type
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Flow Types>Assign Flow Type to Transaction Type
Click on New Entries button, add Product type, Transaction type and Flow type one by one.
Derived Flows are flows which get their values from other flows used in a Transaction. We may use them to calculate charges, taxes etc. or we may use them to combine value of multiple flows into one single flow e.g. if multiple interest flows are generated in a period but we want to post single combined value into financial accounting.
Derived flow customization are optional based on business requirement.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Flow Types>Derived Flows
D- Update Type for Letter of Credit
We assign GL account to update types which post to financial accounting. How to assign GL account to update type are explained in another Blog.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Update Types>Define Update Type and assign usage
Click on create new button and create update type by adding code and description.
After update type creation assign usage to it.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Update Types>Assign Flow type to update type
Click on create new button and add Flow type, Direction and Update type.
E - Condition Type for Letter of Credit
Condition Type are used to calculate fee for Letter of Credit and Bank Guarantee.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Condition Types>Define Condition Type – Trade finance transaction
Condition type: assign Code and add description in blew 3 fields
Classification: Classification subdivide flows and condition, choose classification
Category: Assign category to condition type
Profile Category: choose Profile category for the condition
Generated Flow Types: Add Flow type which will be added in deal if condition is used
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Condition Types>Assign Condition Type to Transaction Type – Trade finance transaction
Click on New Entry Button and Add Product Type, Transaction type, condition type and Direction
F – General Valuation Class for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Assign General Valuation Class – Trade finance Transaction
General Valuation Class is required field for all Transactions in TRM, by assigning here system will auto assign General Valuation Class else user need to add during deal creation.
Click in New Entry Button and add company code, Product type, Transaction type and choose General Valuation Class
G - Document Type for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Define Document Type – Trade finance Transaction
As we know there are number of documents are involved in L/C and managing them and accessing them when required is a critical task. Here in configuration we may create list of document type and in deal we may add them with specific tag created here
Click on New Entry Button and add Doc Type code and Description.
H – Define condition for payment and presentation period for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Define condition for payment and presentation and presentation period
Click on New Entry Button and add Period Condition, Choose Period Condition type, choose field name and Description
I – Define Rejection Reason for L/C Presentation for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management> Define Rejection Reason for L/C Presentation
Click on New Entry Button and add reason code and Long name
J – Define Rejection Reason for L/C Presentation for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>General Settings>Accounting>Settings for Position Management>Assign Position Management Procedure
Position management procedure is a critical area in SAP TRM, The position management procedure determines which steps are used in the valuation or in generating the Derived Business Transactions and also the sequence in which the steps are performed. We use the valuation function to value the positions of financial instruments based on historical cost or fair value for a given key date, and transfer the results to financial accounting.
Click on New Entry Button and add Valuation Area, Product type and Position Management Procedure
We can also use other fields according to requirements.
K – Define Account determination for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>General Settings>Accounting>Link to other Accounting Components>Define Account determination for Treasury and Risk Management
Click on New Entry button and Add Account symbol, account Assignment Reference and GL Account
GL Account assignment depend on organizational requirements. Following are sample data how to assign GL account. Details of assigning GL account is also described in another Blog with all details.
Conclusion
I have tried to explain each and every step of configuration in detail. Most of Configurational objects are pre-configured in latest S/4 HANA system but as we know Trade Finance is available ECC EHP8 onwards so in EHP8 we have to define each and every steps given in this document.
With this configuration we also need to configure Company code specific configuration before creating L/C transaction from Front End.
Cheers
A letter of credit, or a credit letter, is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility (financial assistance that is essentially a loan).
Perquisite
There is no perquisite for creation of Letter of Credit configuration, just activate Business Function if following SPRO path is not available.
Product type configuration is at client level, means applicable for all Company codes.
Any Configuration which is Category, These are defined by SAP.
A- Create Product type for Letter of Credit
The product type classifies a financial instrument in SAP Treasury and Risk Management. If we look at all the financial instruments, we see that they are very different in terms of their properties and features.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Product type>Define Product Type
Click on New Entries Button
In following screen we have to define
- Product type: we can Assign 3 character code, in SAP standard code are 85A for LC so it’s better if we define code in series of 8xx. Currently I am assigning LC.
- Text: long and short description of Product type
- Product Category: 850 (always same for Letter of credit) it’s defined by SAP we create new Product Category.
- TF Category: here we have two options First Letter of Credit and second Stand by Letter of credit. Here I am defining Letter of credit for standby letter of credit we have to create another Product Type
B- Create Transaction Type for Letter of Credit
The transaction type differentiates among the various transactions that we can trigger by means of a product type. For example Issue Letter of Credit and Receive Letter of Credit.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Transaction Type>Define Transaction Type
Click on New Entries Button
In following screen we have to define
- Product type: Assign LC (created in previous step)
- Transaction type: 100 for issuance
- Transaction Category: 100 (For Issuance) (These are defined by SAP we can just choose)
- Number Range: 01 (or any other which we will use for this)
- Processing Category: 00002 (These are defined by SAP we can just choose)
- Choose Automatic Posting Release
- Choose Automatic Settlement on confirmation
- Underlying Product type: 55A
- Underlying Transaction Type: 200
Underlying Product type and Transaction Type are used to create import Bill. It’s a front end process where we create and automatic loan deal for payment of Letter of Credit.
In following screen we have to define
- Product type: Assign LC (created in previous step)
- Transaction type: 200 for Receiving
- Transaction Category: 100 (For Receive) (These are defined by SAP we can just choose)
- Number Range: 01 (or any other which we will use for this)
- Processing Category: 00002 (These are defined by SAP we can just choose)
- Choose Automatic Posting Release
- Choose Automatic Settlement on confirmation
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Transaction Type>Define number Ranges
Enter Company code and click on interval button. We have to do this activity on Development, Quality and Production server.
This number range is used when we create a new deal, system auto assign next number available. In previous steps we had assigned this number range.
C- Create Flow Type for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Flow Types>Define Flow Type
Click on New Entries Button and Create Flow Types for Trade Finance
1100 and 1110 is for Contingent liability posting.
1204, 1205, 1206 and 1207 are for Interest conditions which shall be applicable if required.
1840, 1850 and 1860 are related to payments
1901 and 1905 are related to other flows
Flow Type: add code flow Type
Name: Description of Flow Type
Flow Category: Defined by SAP, Assign according to requirement
Relevant to posting: This Flow results in a Position change
Relevant to Position: This Flow determines whether posting records are created from a flow type or whether they should only use for statistical purpose
Relevant to Valuation: Flow to be incorporated into the valuation
Relevant to P/L: Flow related to an Expense or a Revenue
Rel, for Acc/Defer: The flow has to be Accrued/Deferred
Fee indicator: if the fee indicator is set, the flow type represent a fee
Payment request: should this flow generate a Payment request or not (Payment request is used in payment program Tcode: F111)
Individual payment: e.g Compensation or netting allowed for this flow type or not
After creating flows next step is to assign flow type to Transaction Type
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Flow Types>Assign Flow Type to Transaction Type
Click on New Entries button, add Product type, Transaction type and Flow type one by one.
Derived Flows are flows which get their values from other flows used in a Transaction. We may use them to calculate charges, taxes etc. or we may use them to combine value of multiple flows into one single flow e.g. if multiple interest flows are generated in a period but we want to post single combined value into financial accounting.
Derived flow customization are optional based on business requirement.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Flow Types>Derived Flows
D- Update Type for Letter of Credit
We assign GL account to update types which post to financial accounting. How to assign GL account to update type are explained in another Blog.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Update Types>Define Update Type and assign usage
Click on create new button and create update type by adding code and description.
After update type creation assign usage to it.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Update Types>Assign Flow type to update type
Click on create new button and add Flow type, Direction and Update type.
E - Condition Type for Letter of Credit
Condition Type are used to calculate fee for Letter of Credit and Bank Guarantee.
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Condition Types>Define Condition Type – Trade finance transaction
Condition type: assign Code and add description in blew 3 fields
Classification: Classification subdivide flows and condition, choose classification
Category: Assign category to condition type
Profile Category: choose Profile category for the condition
Generated Flow Types: Add Flow type which will be added in deal if condition is used
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Condition Types>Assign Condition Type to Transaction Type – Trade finance transaction
Click on New Entry Button and Add Product Type, Transaction type, condition type and Direction
F – General Valuation Class for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Assign General Valuation Class – Trade finance Transaction
General Valuation Class is required field for all Transactions in TRM, by assigning here system will auto assign General Valuation Class else user need to add during deal creation.
Click in New Entry Button and add company code, Product type, Transaction type and choose General Valuation Class
G - Document Type for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Define Document Type – Trade finance Transaction
As we know there are number of documents are involved in L/C and managing them and accessing them when required is a critical task. Here in configuration we may create list of document type and in deal we may add them with specific tag created here
Click on New Entry Button and add Doc Type code and Description.
H – Define condition for payment and presentation period for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management>Define condition for payment and presentation and presentation period
Click on New Entry Button and add Period Condition, Choose Period Condition type, choose field name and Description
I – Define Rejection Reason for L/C Presentation for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>Trade Finance>Transaction Management> Define Rejection Reason for L/C Presentation
Click on New Entry Button and add reason code and Long name
J – Define Rejection Reason for L/C Presentation for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>General Settings>Accounting>Settings for Position Management>Assign Position Management Procedure
Position management procedure is a critical area in SAP TRM, The position management procedure determines which steps are used in the valuation or in generating the Derived Business Transactions and also the sequence in which the steps are performed. We use the valuation function to value the positions of financial instruments based on historical cost or fair value for a given key date, and transfer the results to financial accounting.
Click on New Entry Button and add Valuation Area, Product type and Position Management Procedure
We can also use other fields according to requirements.
K – Define Account determination for Letter of Credit
SPRO>Financial Supply Chain>Treasury and Risk Management>Transaction Management>General Settings>Accounting>Link to other Accounting Components>Define Account determination for Treasury and Risk Management
Click on New Entry button and Add Account symbol, account Assignment Reference and GL Account
GL Account assignment depend on organizational requirements. Following are sample data how to assign GL account. Details of assigning GL account is also described in another Blog with all details.
| Update Type | Purpose | DR/CR | Account Symbol | Account Assignment Reference | G/L Account |
| TF1100+ | Nominal Increase | Debit | C.2 | XXXXXXXXXXX | Technical Clearing Account |
| Credit | 0 | XXXXXXXXXXX | L/C Contingent Liability Account | ||
| TF1840+ | Payment Obligation | Debit | 0 | XXXXXXXXXXX | L/C Contingent Liability Account |
| Credit | C.2 | XXXXXXXXXXX | Technical Clearing Account | ||
| TF1850- | Accept Payment | Debit | C.1 | XXXXXXXXXXX | Vendor Account |
| Credit | 3 | XXXXXXXXXXX | BANK GL Account | ||
| TF1901- | Bank charges | Debit | 4.2.2 | XXXXXXXXXXX | Bank Expense Account |
| Credit | 3 | XXXXXXXXXXX | BANK GL Account |
Conclusion
I have tried to explain each and every step of configuration in detail. Most of Configurational objects are pre-configured in latest S/4 HANA system but as we know Trade Finance is available ECC EHP8 onwards so in EHP8 we have to define each and every steps given in this document.
With this configuration we also need to configure Company code specific configuration before creating L/C transaction from Front End.
Cheers
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