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Now that I’ve introduced you to Can an Asset also be a Liability?  An Introduction to SAP Asset Retirement Obligation Management (AROM) (Part 1) I’d like to show you how they work.

To start with, I’ll create a simple ARO and walk you through some of the calculations and reporting that is available.

Below is a completed ARO.  You’ll notice that there are three main sections; General Data, Cost Estimation Plans, and the Calculation Details at the bottom.  Since the screen is so large, I’ll cover each section in detail.  This also is a good way to work with an ARO because each section provides more details about the section above it.  You will naturally follow the ARO’s information from top to bottom.

ARO

General Data

First, the General Data section.  This area acts as a header to the detailed Cost Estimation Plans (CEP) that are entered against an ARO.  There is a General tab, shown below, that stores some date information as well as the asset class and the interest and inflation rate keys.  If the ARO is assigned to an underlying object, it will be displayed here.  I’ll cover underlying objects in a future blog.

General Tab

After the General tab are a series of tabs for each accounting principle.  In the US, we are only focused on US GAAP (shown as USG in the image below) and IFRS.  Other international customers may require different tax or local GAAP valuations such as HGB in Germany.  Either way, an ARO can manage up to 8 distinct valuations in parallel.

The accounting principle tabs store the inflation and interest rate keys that are used in the discounting calculation.  For US GAAP, there is also a specific calculation method that is used to influence a layering of the CEP values based on subsequent changes.

US GAAP Data

The last tab displays the ARO’s account assignments.  An ARO can be assigned to most any typical account assignment object such as business area, cost center, internal order, WBS element, profit center, segment, and functional area.  It can also be assigned to others such as Plant, Location, or Room to support additional information in reporting.

Account Assignments

Cost Estimation Plans

Once the information in the General Data section has been completed, it is time to move on the transactions area.  AROM uses cost estimation plans to assess the value of the ARO.  Each CEP has some distinguishing characteristics:
•    Settlement Date – This is the due date of the payment used to retire the asset.  It is possible to have multiple settlement items in a single CEP where each item has a different settlement date.
•    Price Key Date – This is essentially a valuation date.  The price key date is used to determine the rate which is chosen when calculating the settlement item.
•    Cost Estimate – This is the amount that is estimated to retire the asset.

In the image below, the first CEP is for $10MM and is an estimate to tear down the asset.

CEP

It is possible to have multiple CEPs for a single ARO.  To support this, the CEPs are displayed in a tabular grid and are to be interpreted sequentially.  For a simplistic ARO, the asset will be retired in one process so only a single CEP is required.  However, more complex scenario exist where there may be multiple stages of the retirement and restoration process.  Also, AROM tracks changes to the cost estimates as individual CEPs.  If a change in the interest or inflation rate key is required, a new CEP will have to entered.  The image below shows the details for a second CEP related to the same ARO.  THe second step in the retirement process would be to restore the land to its original use so a second CEP is created for $1MM.

CEP

As I mentioned earlier, the CEPs are viewed in a tabular grid and can be viewed from within the ARO. 

Multiple CEP

Calculation Details & Reporting

Now that the CEPs have been entered the final section will display details about the calculation.  First, the General tab will show some header type information about the CEP that is selected above.

Transactions

Focusing on the US GAAP calculation, the ARO’s current cost estimate value is displayed.  On the right side is additional data related to the ARO’s initial provision amount of $3.198MM as well as the expected provision amount at the end of the obligation’s life (Provision EOO of $17.758MM).  The total interest cost at the end of the obligation’s life of $14.559MM is also shown.

Calculation Details

From this section it is possible to launch a series of more advanced tools to provide more information on the values displayed in this section.  First, AROM also has an excellent calculation trace tool that will explain the specific calculation steps.  This shows how the initial cost estimate is inflated out to the ARO’s expected retirement date and then subsequent net present value calculation back to the current date.

Calculation Details

A cash flow report can also be generated.  This will show a period-by-period breakdown of the interest expense and the amount of the provision’s increasing balance.

Cash Flow

Finally, for US GAAP it is required to track any subsequent changes in the form of a calculation layer.  AROM supports this via a handy calculation layer report.  For this simple ARO, there is only the initial layer to account for.

Layer

However, once the ARO has a subsequent retirement or negative adjustment, the different layers are created.  I’ll go into more detail on the US GAAP layers in a future blog.

Layer

Next Blog

In the next blog I’ll cover how the Lease Accounting Engine (LAE) and discuss the importance of it to AROM.

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5 Comments

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  1. Asheesh Bhatia

    Thanks Nathan for an excellent series on this topic. I have question on the ‘price key date’. In your example, the asset was 1st capitalized on 8/1/2011 and is expected to be retired in 12/2040. What is the 1/1/2012 date then and what does the CE of Price KD reflect? Also is the Current CE of $9917828 the current cost of retiring the asset? Is this a derived figure based on the discounted rate?

    Thanks

    Asheesh

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    1. Nathan Genez Post author

      The 1/1/2012 date is the price key date.  It is used to provide a date valuation reference on the $1MM that I entered.  i.e., the $1MM was the estimate to remove the asset and it was given on 1/1/2012.  But since the CEP needs to be valuated on a prior date, the $1MM is initially discounted back to this date four months earlier (9/1/11) which results in a slightly smaller number.

      The amount reflects all of the costs estimated to retire the asset and restore the property to it’s original condition and it’s completely independent of the underlying asset’s value.  In theory, the asset is worth $0.00 at retirement anyways.

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      1. Asheesh Bhatia

        Thanks Nathan. That explains it.

        A couple of more questions:

        1. Is Lease Accounting Engine mandatory in order to implement AROM?

        2. Once the add on is implemented, is it considered a SAP CDP (meaning we need SAP help to configure), for example like the Asset Mirror Tool.

        3. Do you plan to release more follow on articles on this subject.. I think you mentioned some where in the 2 blogs that you plan to release more documents on this topic.

        Thank you very much for an excellent write up

        Regards

        Asheesh

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