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Federal Government: Economic Justification (New) ( RELNPSM_20_PPA_ECON_JUST )

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Short text

Federal Government: Economic Justification (New)

Use

As of SAP R/3 Enterprise Public Services 2.0, the Prompt Payment Act (PPA) feature in the US Federal Government solution has been revised to reflect changes in the regulations.

For discounts offered by the vendor, agencies must decide if it is more economical to pay early (accept the discount) or pay on the normal PPA payment due date (reject the discount). The same holds true for rebates offered by purchase card issuers. Agencies must decide if it is more economical to pay early (accept the rebate) or pay on the normal PPA payment due date (reject the rebate).

Agencies are required to determine purchase card payment dates based on on analysis of total costs and total benefits to the Federal government. When calculating costs and benefits, agencies are expected to include the cost to the government of paying early. This cost is the interest the government would have earned based on the Current Value of Funds Rate (CVFR).

The revised Prompt Payment regulation requires agencies to determine government-wide commercial purchase card payment dates based on an analysis of the total benefits to the Federal government as a whole. Specifically, agencies are required to compare daily basis points offered by the card issuer with the corresponding daily basis points of the CVFR. If the basis points offered by the card issuer are greater than the daily basis points of the CVFR, the government will maximize savings by paying at the earliest date. If the basis points offered by the card issuer are less than the daily basis points of the CVFR, the government minimizes costs by paying on the Prompt Payment due date or the date specified in the contract.

Agencies use a formula to calculate whether to pay early or on the normal Prompt Payment due date. The CVFR daily basis points are compared with daily basis points offered by the card issuer to determine economic justification. The following formula is used to calculate the average daily basis points of the CVFR:
(CVFR/360)* 100

Agencies must then compare this CVFR daily basis points to the daily basis points offered by the card issuer. To obtain daily basis points offered by the card issuer, agencies may refer to their contract with the card issuer.

Example:

·,,Card Issuer daily basis points = 1.5 basis points

·,,CVFR = 6%

o,,CVFR daily basis points = 1.67 based on the following calculation:

(.06/360) * 100 = 1.67

At a CVFR of 6%, the daily basis points of the CVFR are 1.67 basis points. The government earns 1.67 basis points for each day it delays paying the card issuer. Since 1.67 is greater than 1.5 offered by the card issuer, the agency should pay as close to the payment due date as possible so the Government continues to earn interest on its funds. However, if the basis points offered by the card issuer are more than the daily basis points of the current value of funds, the government should pay as early as possible to maximize savings.

Users can set a value for the daily basis points in the company-code-specific vendor master data (transaction XK02). When this information is saved, there is an algorithm for economic justification that runs in the background and determines whether the vendor basis points are more than the converted daily basis points valid for this time period. The latter is obtained from the configuration for interest rates (transaction OFIR) where you can enter the CVFR, which is then converted to the daily basis points. If the vendor basis points are more than the daily basis points, the vendor will have to pay immediately and therefore the vendor will have a new payment term (purchase card payment term if you have configured one). On the other hand if the daily basis points are more than the vendor basis points, the old vendor payment term remains unchanged. If there was no default payment term to begin with, a new default payment term (if configured) is entered as the vendor master default.

The functionality is also triggered when you have to make a change to anexisting value of the CVFR (transaction OFIR). Such changes should be avoided and should be resorted to only when absolutely necessary. Whenever such a change takes place, the same comparison algorithm is run in the background for all vendors that would be affected by it and, if required, the current payment term is replaced with the purchase card payment term or the purchase card payment term is replaced by a default payment term (if you have configured this).

The US Federal Government pushbutton is visible on all the vendor master screens. Whenever you click on this pushbutton, a new screen is displayed with two new (tabstrips) subscreens.

Selection of the US Federal Government tabstrip displays a screen allowing entry to fields 'Agency Location Code' and 'Payment Office'.

Selection of the Purchase Card Information tabstrip displays a screen allowing entries in the basis points field.

Effects on Existing Data

Existing Transaction OFIR allows you o use view V_T023R to assign the interest indicator (whether the penalty interest or the CVFR), the start validity date of an interest rate and the interest rate. In the case of interest penalties, the corresponding indicator must be selected and the interest rate is that for penalties. When the data entered is saved, the respective fields in table T023R are updated.

Effects on Data Transfer

Effects on System Administration

Effects on Customizing

Further Information

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