Financial Agreement Controlling

Financial Agreement Controlling is a module within M3 Financials and is used for the accounting of financial agreements, for example leases.

This document explains how to:

Outcome

Before you start

Common starting conditions

Financial agreement accounting info type Accounting event Accounting type Description
10 AG10 650 Lease liability
11 AG10 651 Lease amortization
12 AG10 653 Lease liability adjustment
13 AG10 350 Adjust lease liability – Local currency
15     Reverse lease liability
16     Reverse lease amortization
17     Reverse lease adjustment
18     Reverse lease adjustment – Local currency
21 AG10 652 Lease amortization offset
22 AG10 654 Lease liability interest
30 AG10 660 Right-of-Use asset
41 AG10 351 Unrealized exchange gains
42 AG10 352 Unrealized exchange losses
43 AG10 665 Lease termination
44 AG10 664 New version cost adjustment
45 AG10 280 Rounding

Limitations

Follow these steps

  1. Create the financial agreement

  2. Manage financial agreement payments

  3. Re-evaluate the outstanding liability

  4. Termination

  5. Remeasure contract

  6. Correct vouchers in (GLS037)

  7. Reset status of the financial agreement line in (CRS418)

Create the financial agreement

Begin by entering a master agreement in 'Financial Agreement. Open' (AGS100) where the basic data for an agreement are also entered. In the master record, the settings are done for the payment interval and the payment day of the agreement, also as the base for the payments.

The payment interval can be set to any number between 1 and 99 and this indicates the number of months between each payment. The payment day, that can be set to 1-31 or 99, will indicate the day the payments are made in the month. 99 is the last day of every month.

The base of the payments can be set to either 1='Supplier Invoice' or 2='Recurring Payment'. This indicates how the payments of the agreements are to be made towards a received supplier invoice or as a recurring payment. If the payment basis is set to 2='Recurring Payment', a record will also be created in 'Suppl. Payment. Open Recurring' (APS095) with recurring payment type set to 3='Financial agreement'. To go to (APS095), related option 18='Recurring Payment' can be used.

Once a master record is created in (AGS100), related option 11 is used to go to 'Financial Agreement. Open Lines' (AGS101). This level of the agreement refers to the right-of-use asset and its creation. When creating the agreement line level, the length of the contract and economic life of the underlying asset is set. Also, the payment amount and payment basis are set. The basis can either be 1–'per payment', or 2–'per month'. This is also where the asset type and depreciation type are entered. After the creation of an agreement line, the line will be in status 10–'New'.

If the lease would include a purchase option that the lessee is reasonably certain to exercise, the price and the date for the purchase option can be entered here. This will be added to the payment plan and be included in the net present value calculation of the lease liability and as a part of the acquisition cost of the related right-of-use asset.

To update the agreement line, use related option 6='create proposal' in (AGS101). This will generate the underlying payment plan and the right-of-use asset. The line will now be in status 30–'Proposal created'. The asset is created in status 5–'preliminary', and the asset ID is created based on the sequential numbering that is set in 'Settings – Fixed Asset Acquisition' (FAS900). The asset can be reached from (AGS101) by using related option 16='Fixed asset'.

If the payment basis was set to 2='Recurring payment' in (AGS100), a recurring payment record will be created in (APS095) but will not yet generate the lines of the recurring payment plan in 'Payment. Open Details for Recurring' (APS096).

When a line is in status 30–'Proposal created', a payment plan corresponding to the line is also created in 'Financial Agreement. Open Payment Plan' (AGS110). Use related option 12='Payment plan' from (AGS100) or (AGS101).

When a line is in status 30–'Proposal created', account entries corresponding to the line is also created (AGS120), with status 30–'Proposal'. Use related option 13='Account entries' from (AGS101).

While the line is in status 30–'Proposal created', the records in the payment plan is in status 10–'Proposal'. During this status, it is possible to amend the amount to be paid, per payment occasion, in (AGS110). If this is done, the line status in (AGS101) will be changed to 35-'Proposal changed'. To be able to activate and adjust the account entries, the proposal must be created again based on a new payment plan in (AGS110) by using related option 8='Recreate proposal' from (AGS101).

If the line should be deleted in this step, first the proposal must be deleted by related option 14='Delete proposal', and the corresponding preliminary asset and account entries will be deleted. Once the line is back in status 10–'Proposal', it can be deleted by using related option 4='delete' in (AGS101).

When the payment plan has been created, the net present value of the future payments is calculated. Payments done on the first day or in advance has the full payment value in the net present value calculation.

To activate the agreement line in (AGS101), use related option 9='Activate'. This will take the line to status 50–'Active', the payment plan records in (AGS110) will be set to status 20–'Active', and the underlying right-of-use asset will be put to status 1–'Normal fixed asset'. If the payment basis was set to 2–'Recurring payment' in (AGS100), this will also create the payment plan in (APS095)/(APS096).

When the line is activated, the accounting for the inception of the agreement will be transferred to GL.

Manage financial agreement payments

Payments inside the lease agreement can be handled manually and through Accounts payable integration.

To manually match the agreement line to a supplier invoice, use related option 6='Allocate to invoice', this will set the record to status 40–'Allocated to invoice'. Use related option 8='Release invoice allocation' to undo the previous action.

To manually set the agreement line as paid, use related option 7='Mark as paid', this will set the record to status 90–'Paid'. Use related option 9='Remove Mark as paid' to undo the previous action.

It is possible to work on either a summary level, where all payments from a master agreement are grouped per payment day, or on a line level, showing each payment per each line. Sorting order 4 in (AGS110) will enable the choice between summary level and line level display.

If a record in (AGS110) is allocated towards an invoice, the record will be updated to status 90–'Paid' when the corresponding invoice is paid. The transaction date set in (AGS110) will be that of the accounting date of the payment for the supplier invoice.

To post GL entries for the records that marked as paid, start 'Financial Agreement. Select Operation' (AGS190). Option 1='Create account entries for payment' will create the accounting entries and transfer to general ledger. After this is done, the status of the records will be 95–'Transferred to GL'. The interest will be managed by the valuation at period end. The accounting date is specified by the user in (AGS190).

Integration to accounts payable

Based on the settings on the agreement header, either a recurring payment plan is created or the financial agreement payment plan can be matched when a supplier invoice is recorded in 'Supplier Invoice. Record' (APS100).

When the 'financial agreement payment basis' is set to 'Supplier invoice' in (AGS100), it is possible to connect the supplier invoice to the financial agreement payment plan. The prerequisites for this is that the parameter 'Financial agreement account' is activated in 'Accounting Identity. Open' (CRS630).

When registering an accounting line in 'Accounting. Open' (GLS120) or 'Supplier Invoice. Recode' (APS112/I), (AGS110) is called to connect the supplier invoice to the financial agreement. When the supplier invoice is later fully paid, the records connected to the supplier invoice in the financial agreement payment plan will be marked as paid and ready for accounting in (AGS190).

When the 'financial agreement payment basis' is set to 'Recurring Payment' in (AGS100), the following happens. A recurring payment header is created in 'Suppl Payment. Open Recurring' (APS095), but no lines are created. The recurring payment lines are created when the agreement lines are activated. It is not possible to have multiple recurring payment lines per payment date. Therefore, the following controls are made upon activation.

It is not possible to have future payments in progress or paid. The controls are done based on the new version date if specified, the initial payment date if specified, or the agreement line start date. When terminating an agreement line, it is not possible to have recurring payments in progress.

When a recurring payment is processed to status paid, the financial agreement payment plan is updated accordingly to allow account entries to be created for the payment.

Re-evaluate the outstanding liability

Use option 2='Re-evaluate lease liability' in (AGS190) to re-evaluate the outstanding lease liability. A leasing contract should be valuated at period end. When making the period end calculation, account entries will be created to ensure the lease liability is adjusted to the correct value. The adjustment of leasing is offset by the interest. If the lease is in foreign currency, a valuation will also be made to adjust the lease liability in local currency. The valuation date of the lease liability is the accounting date specified in (AGS190). The net present value is calculated for the remaining days of the agreement, that is if the user specify valuation date 2017-12-31, the start date of the valuation is 2018-02-01. These account entries are created at period end:

Financial agreement accounting info type Accounting event Accounting type Description
12 AG10 653 Lease liability adjustment
22 AG10 654 Lease liability interest

If the agreement is in foreign currency, adjustments will also be made to adjust the value to the correct amount in local currency with these account entries:

Financial agreement accounting info type Accounting event Accounting type Description
13 AG10 350 Adjust lease liability – Local currency
41 AG10 351 Unrealized exchange gains
42 AG10 352 Unrealized exchange losses

Termination

A lease line can be terminated by using option 17='Terminate agreement line'. When the line is terminated, all account entries connected to the lease liability is reversed and accounted. The fixed asset will be disposed on a separate voucher generated with the 'Fixed Asset Module'. For the termination, these account entries are created:

Financial agreement accounting info type Accounting event Accounting type Description
15     Reverse lease liability
16     Reverse lease amortization
17     Reverse lease adjustment
18     Reverse lease adjustment – Local currency
43 AG10 665 Lease termination

Remeasure contract

In some situations, it is needed to remeasure or modify contracts due to contract changes. Examples of changes are contract length, discount rate, or payment amount. To cope with these changes, M3 has decided to create a new version of the contract line.

Use related option 7='Create new version' in (AGS101) to create a new version of the existing line that needs to be remeasured. When a new version is created, a new version date must be specified and several fields connected to the contract can be changed. When the version is created, the original line is set to status 60–'New version created' and a new version of the line in status 10–'New'. A proposal of the new version should be created and will follow the same principle as when creating a proposal for an original line, meaning a payment plan will be created and account entries for the new version will be created.

These account entries could be created when a proposal is created for a new version:

Financial agreement accounting info type Accounting event Accounting type Description
10 AG10 650 Lease liability
15     Reverse lease liability
16     Reverse lease amortization
17     Reverse lease adjustment
18     Reverse lease adjustment – Local currency
30 AG10 660 Right-of-Use Asset
44 AG10 664 New version cost adjustment
45 AG10 280 Rounding

The account entries from the original line affecting the lease liability, lease amortization, and lease adjustments will be reversed and the new lease liability will be created. The lease liability will be calculated based on the payment plan and the version date specified when creating the new version.

The total lease liability will be offset by either a fixed asset adjustment, or by a cost adjustment. The cost adjustment will be created if the fixed asset is already disposed, fully depreciated or if the remaining fixed asset value will become negative after the adjustment.

When the proposal has been created, it is possible to work with the payment plan and then re-create the proposal. Then, the proposal should be activated. If the fixed asset is in status 1 and the cost could not be added to the fixed asset because the financial agreement information type 44 is created, the fixed asset will be automatically disposed when the update is performed.

Correct vouchers in (GLS037)

When a voucher has been stuck in 'Trans Work File. Restart Erroneous Jobs' (GLS037) and the accounting string is corrected, the accounting string in (AGS120) is updated accordingly.

Reset status of the financial agreement line in (CRS418)

If a job gets stuck during the creation of a proposal, it is possible to reset the status of the financial agreement line in 'Program Problem. Solve' (CRS418).