SOFTWARE REQUIREMENTS SPECIFICATION (SRS)

FOR

Letter of Credit

Version 1.0 12th Dec, 2009

Prepared for:

Softline Software Service (P) Ltd., Hyderabad

Prepared by:

Softline Software Services P Ltd., Confidential

S. M. Rasheed

Softline Software Services (P) Ltd.,

Document Number: 1000-05 Preliminary Documentation Notice This document is considered preliminary to the final version and will be updated by means of total reissue after successful completion of the probation period. Proprietary Notice This Document is the property of Softline Software Services (P) Ltd.; this document shall not be reproduced, copied, or used for any purpose other than consideration of the technical contents without the express written permission of duly authorized representatives of the companies

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SOFTWARE REQUIREMENTS SPECIFICATION (SRS)

FOR

Letter of Credit

Approved: [Project Sponsor] ____________________________ [Designator] date

Accepted: ____________________________ [Software Project Manager] date

Accepted: _____________________________
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[Branch or Division]

date

Revision History

Version

Release Date

Responsible Person

Major Changes

1.0 1.1

12th Dec, 2008 30th Mar, 2009

Rasheed Radha

SRS Document SRS

Softline Software Services P Ltd., Confidential

Contents
1. Introduction..........................................................................................................................6 1.1 Purpose...........................................................................................................................6 2. General Description..............................................................................................................6 3. Specific Requirements........................................................................................................11 3.1 Functional Requirements:............................................................................................11 3.1.1 LC Details:............................................................................................................11 3.2 Adjusting LC against Invoice:.....................................................................................15 3.3 Reports:........................................................................................................................15 3.3.1 LC Detail Report:..................................................................................................15 3.3.2 LC Utilisations Report..........................................................................................16 3.3.3 LC Amendments Report.......................................................................................17 3.3.4 Pending LC's Report.............................................................................................17 4. Supporting Information......................................................................................................18 4.1 Definitions, Acronyms and Abbreviations..................................................................18 5. References..........................................................................................................................19 5.1 Web references.............................................................................................................19

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1.

Introduction

The Letter of Credit (LC) Module is a part of ERP which integrates with other modules of Focus ERP.
1.1 Purpose

Software Specification Requirement (SRS) will provide complete description of Letter of Credit. Purpose of developing this document is to provide complete system flow and requirement to developer and end user. This document will also provide complete software functionality with details.

2.

General Description

A letter of credit (LC) is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking to a beneficiary against complying documents as stated in the Letter of Credit. Originally it was a letter addressed by the buyer's bank to the seller's bank stating they would guarantee payment the seller in case of the buyer's default. The LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any.

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Overview
Qualifying for a letter of credit is not an easy task. It basically requires the applier to fulfill two important requirements. Primarily, the business owner can deposit the actual sum needed for the transaction with a financial institution or a bank, which issues these letters. Secondly, the individual can approach a bank, which is ready to give a line of credit and is ready to issue the letter of credit by making use of the line of credit as collateral. This is a common method of financing a LC, but it is also one of the most hardest as the business of the applicant must qualify for getting finance from the bank. Another trade finance option is purchase order financing. It is an ideal option for companies, whose bank accounts are exhausted. The letter of credit ensures the financial ability of the importer to pay for the goods by substituting the credit of a bank for the credit of the importer. There are several types of letters of credit differing according to their use and the number of banks involved. Outlined below are the business flow and the goods and value flow for a common foreign trade procedure using a letter of credit.

Business Flow in a Letter of Credit Transaction

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8. Payment Accepted

Sellers Bank

3. Issue LC 7. Send Docs

Buyers Bank

9. Make Payment 4. Advice LC 6. Submit Docs

2. Apply LC 10. Make Payment 11. Release Docs

Seller

1. Sign the contract

Buyer

5. Ship Goods

C arrier

5. Ship Goods

1. The importer sends a purchase order to the exporter. The purchase order is a promise to contract purchase of the specified goods under certain conditions. 2. After receiving the purchase order, the exporter issues an order confirmation. The order confirmation is a promise to sell and deliver the goods according to the agreed-upon conditions including payment conditions. 3. The importer, in compliance with the payment conditions the exporter requested, opens a letter of credit at the bank of its choice. This bank is called the opening or issuing bank. The order confirmation and the purchase order are the basis of the letter of credit. The terms and conditions between the bank and the importer are based on the importers credit standing. 4. After approving the request for the letter of credit, the opening bank can contact its branch or affiliate (called the advising bank) in the exporters country to establish and confirm the letter of credit on behalf of the exporter. The letter of credit itself is usually sent through a telex with a set of identification codes that confirm its authenticity. 5. The advising bank authenticates the letter of credit and sends it to the exporter by registered mail. The letter of credit has been formally established, confirming the ability of the importer to pay for the goods. The exporter now ships the goods.

Goods and Value Flow in a Letter of Credit Transaction

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1. The exporter ships the goods to the importer as the letter of credits terms require. Usually the letter of credit specifies shipping details including the mode of transportation, loading and unloading ports, merchandise packaging, and insurance. 2. After shipping the goods, the exporter gives the negotiating bank the valid letter of credit and the required shipping documents. The exporter can select a negotiating bank or use the advising bank as the negotiating bank. 3. The negotiating bank examines the validity of the shipping documents for any discrepancies. If the documents contain discrepancies, the negotiating bank may refuse to accept the documents for negotiation. The exporter may then either apply for an amendment to the letter of credit to allow the discrepancies or submit a letter of guarantee to the negotiating bank. The letter of guarantee states that the exporter is liable if the importer refuses to accept the documents due to the discrepancies. If documents do not contain discrepancies, the negotiating bank accepts the documents and pays the exporter the contracted amount for the goods. Banking charges may be deducted from this payment depending on the letter of credits terms. 4. The opening bank reimburses the negotiating bank for the amount it paid the exporter. In exchange, it receives the shipping documents from the negotiating bank. The negotiating bank may be entitled to collect bank changes from the opening bank depending on the letter of credits terms. 5. The opening bank negotiates with the importer for payment in exchange for the shipping documents. The payment between the importer and the opening bank depends on the terms of their agreement. Some banks require 75% of the order value in advance and the remaining 25% when the shipping documents arrive. 6. After receiving the valid shipping documents from the opening bank, the importer presents the bill of lading to the shipping company and claims the goods. The importer uses other shipping documents like commercial invoices, packing lists, and certificates of origin during customs clearing. For Example: A Buyer called the SMB Computers from time to time imports goods from a Seller called LG, which banks with the ABC Bank. SMB Computers holds an account at the Commonwealth Bank. SMB Computers wants to buy $500,000 worth of merchandise from LG, who agrees to sell the goods and give SMB Computers 60 days to pay for them, on the

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condition that they are provided with a 90-day LC for the full amount. The steps to get the letter of credit would be as follows:

SMB Computers goes to The Commonwealth Bank and requests a $500,000 letter of credit, with LG as the beneficiary. The Commonwealth Bank can issue an LC either on approval of a standard loan underwriting process or by SMB Computers funding it directly with a deposit of $500,000 plus fees which are typically between 1% and 8% of the face value of the LC. The Commonwealth Bank sends a copy of the LC to the ABC Bank, which notifies LG that payment, is available and they can ship the merchandise SMB Computers has ordered with the full assurance of payment to them. On presentation of the stipulated documents in the letter of credit and compliance with the terms and conditions of the letter of credit, the Commonwealth Bank transfers the $500,000 to the ABC Bank, which then credits the account of LG for that amount. Note that banks deal only with documents required in the letter of credit and not the underlying transaction. Many exporters have mistakenly assumed that the payment is guaranteed after receiving the LC. The issuing bank is obligated to pay under the letter of credit only when the stipulated documents are presented and the terms and conditions of the letter of credit have been met

There are several types of letters of credit: The letters of credit are basically of two types, Inland & Foreign. The commercial letter of credit is the former payment mechanism for a transaction. Inland Letter of credit: If transaction is done between the organizations residing in the same country (Trade with in the country) Foreign letter of Credit: If transaction is done between the organizations residing in different countries. i.e. LC is raised by customer in the different country. Commercial letters of credit are being used since centuries, in the international trade to make the payments easier. Their use has increased with the evolution of the global economy. The letters of credit Softline Software Services P Ltd., Confidential 10

used in the international transactions are governed by the International Chamber of Commerce, Uniform Customs and Practice for Documentary Credits. All parties are binding to the general requirements and definitions of the International Chamber of Commerce. In the United States, the domestic collections are governed by the Uniform Commercial Code.

3. Specific Requirements This section contains all the details the software developer needs to create and design
3.1 3.1.1

Functional Requirements:
LC Details:

LC is A binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the shipment of goods within a given time frame.

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Option will be provided to create LC in the system, where all the LC details will be provided 1.1.1.1 Inputs The Following inputs are required to create LC Group Header Field Name Field Type Voucher No Date LC No* LC Description Number Date control Text Box Text Box Possible Values System generated User Specific User Specific User Specific User Specific Purchase or sale Default current server date Validations

Transaction Selection type* Issued To/ Selection Received From*

Values account master

Consider issued to if transaction from type is purchase or received from if sale is done

Issuing bank* Receiving bank* Date of issue* Expiry* LC Type Currency code

Selection Selection Date control Date Selection Selection

User specific User specific User Specific User specific User Specific Inland , Foreign If LC type is Foreign, then Currency code & Exchange rates needs to be given.

User Specific

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Exchange rate LC Value* Credit type

Text Text

User specific User Specific User Specific User Specific Fixed Revolving Automatic /Manual Released /Closed /amended /

limit Selection

Revolving type Selection Status Read only

Invoicing

Value utilized LC Value LC Balance amount

Read Only Read Only Read Only Auto generated Calculative field Values should come in grid

Invoice Details

Invoice ( Multiple)

No Read only Read only Read only Read only Text Box Text Box User Specific Browse button User Specific

Invoice Value Shipment date Received Date Supporting documents Document no( Multiple) Document description Upload document

Values should come in grid

3.1.1.1 Processing

Create: 1. Select option to create LC 2. Enter the details of LC like LC number, Transaction type

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3. If transaction type is sale then enter details of the customer LC received from 4. If transaction is purchase enter vendor details to whom that LS had been issued. 5. Enter issuing and receiving bank details 6. Enter LC Type ,LC value, expiry date etc 7. IF LC is of foreign type then capture the currency code & Exchange rates. 8. Input Credit limit type 9. Enter the details of invoice & Supporting documents if required 10. Then click Save. Amend: Option to amend the Letter of Credit is required. And amendment record has to be maintained, where all the amendments made to the LC should be available. Amendment charges applicable sometimes depending issuing bank. Hence option to capture amendment charges is required Release LC: In exchange for payment, the Beneficiary has to release Letter of Credit for the benefit of the Issuer of the Undrawn Letters of Credit. So that issuer can use it for some other purpose if not expired. Option to release LC is require and status of LC has to be shown in the LC detail Close LC: Option to close the Letter of Credit is required. Once the LC is closed it cannot be used. Cancellation charges are applicable while closing LC. So option to capture cancellation charges is required.

3.1.1.2 Validations:

1. Once any LC is released, it should be treated as open LC, So that LC can be adjusted against other invoices, if not expired. 2. Once LC is closed or cancelled no further transactions are allowed 3. If transaction type is purchase Consider LC is issued to selected Party or if transaction type is sale Consider LC is received from selected Party 4. Mandatory fields cannot be blank 5. Validate the value and expiry date of the LC 6. System should not allow adjusting LC against invoice which has value more than LC. 7. If LC type is Foreign, then Currency code & Exchange rates needs to be given 8. If credit limit type is fixed, LC can be adjusted against invoices up to that credit limit.

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9. If credit limit type is revolving then the same LC can be used for multiple transactions incase if there are regular shipments of the same commodity between supplier and customer. On receipt of the payment advice, the letter of credit amount will be restored by the amount of the bill paid. Eliminates the need to issue an LC for each individual transaction. 10. If credit limit type is revolving, it should ask for revolving type. 11. Voucher date shouldnt be more than LC expiry date
3.2 Adjusting LC against Invoice:

1. Letter of credit has to be adjusted against sales/Purchase invoices. 2. Option of mapping Letter of credit is required in Sales/Purchase invoice 3. If the LC is issued to a vendor, then it has to be adjusted against a purchase invoice.LC number has to be captured in purchase invoice. 4. If the LC is received from a customer, then it has to be adjusted against sales invoice.LC number has to be captured in sales invoice. 5. One Letter of credit can be adjusted against more than one Purchase/sales invoice. For Example: LC of value 1,00,000 can be adjusted two invoices with values 30,000 & 70,000 6. All the open LC need to be listed for selection in invoice, so that user can adjust them against LC. 7. System should not allow adjusting LC against invoice which has value more than LC.

3.3 3.3.1

Reports: LC Detail Report:

With the LC Detail report, you can view the following information: Input: Account name, Bank Name, from date, To date Process: Generate: Enter LC details along with start date and end date and click generate Clear: Click clear to clear the contents of the report option Reset: Click reset to get the previous details Back: Click back to go back to previous menu Output: Report will come with the fields Voucher No, LC No

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LC Description Transaction type Issued To/ Received From Issuing bank Receiving bank Date of issue Expiry LC Type Currency code Exchange rate Credit limit type Revolving type LC Value Value utilized LC Balance amount Invoice No (Multiple) Invoice Value Shipment date Received Date Status
3.3.2 LC Utilisations Report

With the LC Utilisations Report, you can view the amount utilised in that particular LC. With the LC Utilisations report, you can view the following information Input: Account name, Bank Name, from date, To date Process: Generate: Enter LC details along with start date and end date and click generate Clear: Click clear to clear the contents of the report option Reset: Click reset to get the previous details Back: Click back to go back to previous menu Output: Report will come with the fields

LC No. Description Issued to/Received Issuing Bank Date of Issue Expiry Date Order No.

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 3.3.3

Shipment date Order Value

LC Amendments Report

With the LC Amendments Report, you can view the amendments done in the LC's. With the LC Amendments report, you can view the following information: Input: Account name, Bank Name , from date, To date Process: Generate: Enter LC details along with start date and end date and click generate Clear: Click clear to clear the contents of the report option Reset: Click reset to get the previous details Back: Click back to go back to previous menu Output: Report will come with the fields LC No. Description Transaction Issued to/Received from Issuing Bank Date of Issue Expiry Date Amendments Bank LC No. Description Previous LC Value LC Value Expiry Date LC Amended The system will populate the amended LC Value. To print the report, click Print. To see the report on screen, click Preview. If you want to save your report and print it later, click Cancel (the program automatically saves the report).
3.3.4 Pending LC's Report

With the Pending LC's Report, you can view both the amount utilized and amount remaining with Expiry date of the Letter of Credit. Input: Account name, Bank Name, from date, To date

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Process: Generate: Enter LC details along with start date and end date and click generate Clear: Click clear to clear the contents of the report option Reset: Click reset to get the previous details Back: Click back to go back to previous menu Output: Report will come with the fields

LC No. Description Transaction Type Currency Code Issued to/Received LC Value LC Value LCY Value Utilised Remaining Amount Expiry Date

4.
4.1

Supporting Information
Definitions, Acronyms and Abbreviations

Abbreviation
LC DBA PM RTM SCM

Description
Letter of credit Database Administrator Project Manager Requirements Traceability Matrix Software Configuration Management

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SDLC SOP SPI SQA

Software Development Lifecycle Standard Operating Procedure Software Process Improvement Software Quality Assurance

5.
5.1

References
Web references

www.google.co.in www.wikipedia.org

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