IFRS16 – Lease standard SAP Solution

through Real Estate Management

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In January 2016, the IASB (International Accounting Standards Board) issued IFRS 16 Leases.

Period 1 2 3 Total

Lease Payment ( year payment in $11,000 $12,000 $13,000 $36,000

arrears)

To calculate the value of Right-of-use (RoU) and liability this needs to converted to the present value
by multiplying the above values for present value interest factor.

For this example, let’s consider interest rate of 6%.

Period 1 2 3 Total

Lease Payment ( year payment in $11,000 $12,000 $13,000 $36,000

arrears)

PV value Interest factor 6% 0.9434 0.89 0.8396

Present Value Lease Payment $10,377.40 $10,680.00 $10,914.80 $31,972.20

New Asset recognition for operational Lease

Asset 1 2 3 Total

RoU Asset Value $31,972.20

Depreciation ( 31,972.20/3) $10,657.40 $10,657.40 $10,657.40 $31,972.20

Residual value of RoU Asset $21,314.80 $10,657.40 $0.00

Liability Present for the Operating lease

Liability 1 2 3 Total

Liability Value $31,972.20

Interest repayment 6% ( RVEP*.06) $1,918.33 $1,373.43 $735.84 $4,027.60

 Repayment ( Lease payment – $9,081.67 $10,626.57 $12,264.16 $31,972.20
Interest)

Residual value at End of Period-RVEP $22,890.53 $12,263.96 -$0

(Ex: Y1: 31,972.20-Interest)

SAP recommended solution for IFRS16

SAP Overview about the new IFRS 16 and US-GAAP Leasing standards:

https://www.sap.com/assetdetail/2017/01/eaf2f899-a47c-0010-82c7-eda71af511fa.html

In order to comply with the new IFRS 16 lease accounting standard, companies need to adapt their
SAP ERP system. The SAP solution for lease contract management is based on the SAP Flexible
Real Estate module (SAP RE-FX), which is integrated with SAP FI, CO and AA. It is important to
know that it’s not necessary to implement and define the entire SAP RE-FX module.

SAP account determination for valuation posting:

Balance sheet: Right of Use Asset (Reconciliation account –Asset)

Asset Clearing

Lease Clearing

Lease Liabilities

Lease Creditor (Reconciliation account – Vendor)

Profit and Loss: Interest Paid

Depreciation

Lease Expense

SAP Postings expected from the new lease accounting process:

At the time of entering the new lease contact and activate it in the system it will post in RoU asset
(capitalized) and post against the leased liability.

1. A. Asset Value to clearing

Dr RoU Asset (B/S) $31,972.20

Cr Asset Clearing (B/S) $31,972.20

B. Clearing to Liability

Dr Asset Clearing (B/S) $31,972.20

Cr Lease Liability (B/S) $31,972.20

2. Interest Posting against the lease liability form the RE-FX monthly posting run

Dr Interest Paid (P/L) $1,918. 33

Cr Lease Liability (B/S) $1,918. 33

3. Depreciation Posting

Dr Depreciation (P/L) $10,657.40

Cr Acc. Depreciation (B/S) $10,657.40

4. Rent Payment posting, this will decrease the remaining lease liability which is posting against the
lease clearing account.

Dr Lease Liability (B/S) $11,000.00

Cr Lease clearing (B/S) $11,000.00

Dr Lease clearing (B/S) $11,000.00

Cr Lease Creditor (B/S) $11,000.00

How the solution delivers form SAP RE-FX

SAP Real Estate Management solution for lease accounting is a functional extension of SAP Real
Estate Management. It is based on contact and includes the following functions.

 Contract objects for lease contracts

 Definition and assignment of valuation rules for contract conditions
 Mass maintenance transaction for creating and changing valuation rules
 Valuation run and valuation postings (including simulation and cancelation).

Configuration Requirement:

1. For operational lease assets, it is recommended to create the new lease contract in SAP RE,
for this purpose, first contact valuation need to get activated using CE01 to use the functions
for the balance sheet valuation according to IFRS.
2. Define the customization setting for valuation process. (Valuation principle, valuation rule,
account determination, ect.)
3. Integration settings with SAP FI, CO and AA.
The SAP RE-FX module also enables to add ‘Statistical Conditions’ to contract valuation. The use
of those in the light of balance sheet valuation of lease contracts is for recording initial costs incurred
before the contract start, such as broker fees or installation costs.

When recorded as a statistical condition, those costs are considered for the calculation of the RoU-
asset value even though the invoice is already posted in accounting in the regular accounts payable
flow and thus has no influence on the future lease liability.

Implementation Strategy

1. If business is currently using the real estate (RE) new functionality can be used additionally.
2. SAP Note: 2255555 valuations for leasing contacts
3. If business is currently in ECC system SAP RE-FX can implement in the current system and
later can be migrated to the SAP S/4 HANA. SAP Note: 2254013 SAP Real Estate for S/4
HANA
4. If company is already in the S/4 HANA platform, then it’s only need to implement the SAP
RE-FX.

Note: When searching for SAP notes for lease accounting search SAP component RE-FX-LA

Workaround solution if not implementing the SAP RE-FX

 Configure new asset class for RoU Assets – Eg: ZRoU

 Asset account determination (assign Reconciliation account, depreciation, accumulated
depreciation, ect..)
 Asset depreciation key based on the depreciation method. Eg: Straight-line
 Post operation lease information in new asset class (RoU) after calculating the present value
(PV) of the lease manually.
 Post Lease Liability value (G/L Posting)
 Execute depreciation run (AFAB) on Lease assets (RoU) at the month end to post the
depreciation.
 Manually calculated Interest can be posted periodically (G/L Posting
 Lease payment to vendor.

For the workaround solution lot of manual intervention required. All the calculations to derive present
value of the lease, interest and recalculation if there is any changes to be done manually.

Therefore, it is not recommended going for workaround if company has quite a lot of lease contracts.

IFRS 16 Real Property Leasing with SAP

Real Estate Management
Summary

The Financial Accounting Standards Board (FASB) and the International Accounting
Standards Board (IASB) recently announced the release of new accounting standards
that define how organizations must account for leases. Essentially, these accounting
standards stipulate most leases must be reported on each company’s balance sheet,
increasing the risk of regulatory noncompliance and inaccurate statutory reporting.

SAP Real Estate Management is used to optimize the portfolio of global assets and
supports the regulatory compliance of these new accounting rules. This solution
provides a single point of entry for collection, validation of lease contract data, performs
valuation calculations and generates the financial postings derived from these
calculations.

The Compelling Event

 New standard on leasing released by FASB and IASB

 Need to capitalize many corporate operating leases and record these lease
obligations on the balance sheet as assets and liabilities
 Boosts the amount of debt on balance sheets by tens of billions of dollars
 Beside affected accounting, new standards will transform corporate business
processes in many areas, including finance, procurement, tax, treasury, legal,
operations, corporate real estate and HR

Which Customers are affected?

 Every IFRS/ US-GAAP reporting company renting real estate or leasing

equipment will be impacted by the new standards
 Large companies with big property portfolio are affected most and need to react
quickly to prepare

The Solution

The new leasing standards represent more than accounting changes. They force
business process change and with any business or process change, there’s going to be
some level of impact on systems and technology.
SAP Real Estate Management enables close collaboration between the lease
administrator, lease accountant and fixed asset accountant. They access the same
lease record, with all calculations being based on the terms and conditions of the
abstracted lease. The lease transaction in SAP Real Estate Management provides
separate authorizations to ensure a clear separation of duties. The following illustration
highlights the coordination between the different departments provided within the
solution.

In addition to capturing contract terms and conditions, SAP Real Estate Management is
specifically designed to support real estate leasing processes such as managing critical
dates, exercising renewal options, early terminations, rent escalations and sales based
rent. The highly flexible and extendable forms collect industry- or business-specific-
attributes and enables users to stay ahead of the game. Periodic posting runs
automatically generate all lease payments based on the terms of the current lease
agreement with real time integration into SAP Financials.
The solution also provides lease accountants the ability to evaluate the financial impact
of each lease and ultimately generates all valuation postings required by the new
leasing standards. It even manages the postings for multiple lease accounting
standards simultaneously, regardless if the general ledger account or parallel ledger
methodology is utilized. This solution is part of SAP Finance and is completely
integrated, helping avoid the kind of costly disruptions that can derail critical business
processes, operations and costly noncompliance events.

Why SAP Real Estate Management?

SAP Real Estate Management is specifically built to integrate with SAP Financials. No
other real estate software provider can take abstracted lease data, generate payments
to landlords and perform all valuation calculations and postings back into SAP without
cumbersome interfaces. SAP’s real estate solution performs all these activities in real
time and without complicated interfaces.

If a company uses spreadsheets or an alternative solution, information silos will

naturally exist between lease administrators and accountants. Data becomes
inconsistent over time, resulting in inaccurate valuations and misstated financials. SAP
Real Estate Management breaks down silos between these groups, ensuring
transparent, consistent and accurate results.

SAP Real Estate Management will help improve your decision making through greater
visibility into portfolio wide lease data. All in all, the solution provides you with improved
understanding all the associated legal, financial, and business implications of your
leasing strategy in a way not available with other solutions.

What to Do Now?

Even though the new leasing standards are not effective until December 2018 for US
GAAP and January 2019 for IFRS, companies can choose to be early adopters and
begin reporting January 2017. Whether you choose to be an early adopter or comply by
the deadlines, there are certain things you can do today to prepare.

 Current SAP Real Estate Management users should implement the new leasing
enhancements as soon as they are release to begin evaluating the impacts to
your financial statements. Even if you do not intend to be an early adopter, the
 loading of the leases and analyzing the results will pay big dividends in the
future.

 If you use SAP Financials, you can quickly implement SAP Real Estate
Management for real property leasing to give you a fully integrated leasing
solution. SAP currently has and will roll out new accelerators designed to help
customers quickly implement SAP’s leasing solution.

Once SAP Real Estate Management has been implemented, begin abstracting existing
lease agreements and ensure the abstracted lease terms and conditions are
correct. For most organizations, this will be the most time consuming portion of the
lease compliance project. All calculations are dependent on accurate lease
information. Any inaccuracy in probable end dates and payment amounts for example,
will have an impact on the posted valuations.