T-code for Contract creation : RECN

Contract can be created taking an existing contract as a reference or can be created from scratch

Company code used is LEAS mostly.

Contract type is “Leasing”

Contract can be Lease-in or Lease-out

Lease-in : I’ll be leasing a property from a BP. I am responsible for payment to BP.

Lease-out : I’ll be leasing out a property to a BP. I am the receiver of payment from BP.

BP : 171

Contract term : 01.01.2017 to 31.12.2017

The FI posting period should be open for the contract, hence we use 2017.
 1. General Data

2. Business partner details

We can have multiple partners for a single contract.

In this case BP 171 is leasing an object and will be the payer. i.e., 171 is leasing in an object from
company code LEAS.
3. Term details :

Denotes the term for which the contract will be active.

In case of early termination of the contract, a notice has to be issued to the BP.

4. Objects :

We link the contract and the asset here.

An object can be any entity like a land or aircraft part etc etc.
In addition, a contract it self can be an object.
Ex: we could have leases where a collateral ( physical object ) is not involved.

I’ve created a contract object ( COB ) and account assignment CTR 0001/LEASING.
5. Differing Measurements :

Additional details about the object leased.

Ex: in case of a real estate lease this might contain the details and specifications of the area
leased out.

We mostly use this for reporting purpose.

6. Posting Parameters :

 Postings
 Frequency
 How the payments are going to be made, is it going to be daily, monthly or yearly.
 Payment would be in advance or In arrears or mid-term
 When is the due date etc.

 Organizational Assignment
 Business area, Profit center assignment
Typical FI terminologies
 Profit center : REFX_DUMMY
Business Area : 0001

7. Conditions :

This is where we create the conditions on which the payments will be made.

Click on “Insert Conditions” button to create a payment condition

I am creating a Credit side basic rent which BP 171 will be paying me.
There can be multiple conditions as well. Lets say the payment amount from Jan-June will be 100EUR
and July to Dec will be 110EUR. In that case I’ll create 2 conditions with different valid days and amount.

Similar to posting parameters we can have a term for the conditions.

We can adjust the postings and frequency of postings here.

For example, a payment could be monthly but a posting could happen quarterly or yearly.

Usually the posting parameters and the Terms match but it could be different as mentioned above as
well. Nothing wrong in it.

8. Valuation Parameters :

Based on what rules & parameters the valuations are to be done will be maintained here.

Lets say IFRS16 or non-IFRS ( US GAAP ) etc

I am creating a valuation parameter with rule IFRS16 and with object COB 10.

You can notice that the “Valuation” tab is created only after the valuation parameters are listed.

The condition tab here mentioned about the condition which we have already maintained in the
previous step that’s valid for this object.

Consideration date – this denotes from when this rule has to be considered for evaluation.

There could be certain long running contracts which were created even before the IFR16
standards were in place. In such cases we’ll denote the term from which this rule has to be
considered.

Recent contracts will mostly coincide with the consideration date.

Once this is done, the contract can be saved. The contract number will be generated now
 <NEW> is replaced by Contract number generated.

Activate the contract on saving. This is mandatory for valuation.

You can still see rule status is incomplete. Valuations cant be performed with incomplete rules.

Goto change mode and click on release valuation button to make the valuation parameters
valid.

Also the Asset status is created in this stage.

9. Valuations :

Valuations will generate the cashflow which will tell us what will be the payment, interest
payout, asset depreciation etc

First step is to simulate the cashflow and then generate it using “Perform Valuation”.

Till this operation is performed we wont see the cashflows under OVERVIEW tab.
With <IS 0000360000>

On simulation the system gives the contract value and NPV for the contract
Save the contract and Perform Evaluation, now the cashflows can be seen under the “Overview”
tab

Coming back to the valuation, lets see the different tabs in detail.

The NPV of the asset is EUR1141.83

Depreciation:

This denotes the rate at which the asset depreciates and the value of the asset for that term.
You can notice that the asset steadily depreciates at 95.15EUR every month and by end of term
the remaining value of the asset is Eur0.00
Clearing : This denotes the amount liable for payment.

Interest :

Based on the interest rate mentioned in valuation parameter and the value of the asset the
interest is calculated.

You can notice that the interest payout keeps decreasing over the term.
This is due to the fact that the interest is calculated on the present value of the asset and as
mentioned in depreciation the value of the asset depreciated over the term.
 NPV of the asset is the sum of total liabilities as of today. In other words the remaining
repayments ( Payment + interest to be paid ).

10. Overview :

The columns in orange relate to the depreciation of asset value.

Closing balance of a period will be NPV – Depreciation of the asset
Ex: 1141.83 – 95.15 = 1046.68
For the second period the closing balance of first period will become the NPV

The columns in Green denote the repayment schedule i.e., reduction of liability.

Here the closing balance of a period will be the opening balance – clearing + Interest

Ex: 1141.83 – 100.00 + 9.55 = 1051.38

You can also notice that the Repayment for the first period is 100.

Ideally repayment should be Clearing – Interest paid

Which should be 100-9.55 = 90.45

But here the repayment is 100.

This is due to the fact that the contract is created with Upfront repayment ( start day of the
month ) and interest is scheduled for last day of the month.

This can be seen under the valuation tab where the difference can be noticed.
EXTRAS :

1. There is a separate T-code RECESH which will extract the valuations for a wide range of
contracts and display it.

2. Under conditions you can see the tax amount filled

This is due to the taxation settings made under Posting Parameters.