Letter of Credit Issued — Contingent Liability
Issuing a documentary letter of credit on behalf of an import customer — off-balance-sheet contingent.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| LC Commitment — Off-Balance-Sheet (Memo) | Off-B/S Debit (+) | 200,000.00 | - |
| Customer LC Obligation (Contra Memo) | Off-B/S Credit (+) | - | 200,000.00 |
💡 Accountant's Note
An LC is a contingent liability until documents are presented and accepted. It is recorded in memorandum/off-balance-sheet accounts. The credit risk exposure is captured in capital adequacy calculations using credit conversion factors (typically 20% for short-term LCs under CBJ/Basel rules).
Practitioner & Systems Framework
💻 ERP Architecture
In SAP, LC issuance is handled in the Trade Finance module (TRM-TF) generating an off-balance-sheet exposure record. In Oracle FLEXCUBE BC (Bills and Collections) module, 'LISSUE' transaction opens the LC. The LC must also be reflected in the credit limit monitoring system to reduce the customer's available credit line.
⚠️ Audit Flags
Auditors verify completeness of off-balance-sheet disclosures. Unrecorded or expired LCs rolled over without re-approval are a major finding. CBJ Basel III implementation requires banks to include LC exposures in the Leverage Ratio and Capital Adequacy calculations. Auditors also check for UCP 600 compliance in LC terms.
📄 Required Documentation
Signed LC application from importer, credit committee approval (or reduction from approved trade line), LC swift message (MT700), credit limit adjustment confirmation, and copy of LC terms approved by compliance.
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Expert Analysis by Qusai Ahmad
General Accountant Supervisor & IFRS Specialist
Specialized in SAP GUI automation and Middle Eastern tax compliance. Building digital tools for the next generation of finance leaders.