A Better Asset and Capital Accounting Solution for Regulated Industries

Capital investment is critical to all SAP customers. The reasons differ between companies and industries but for the most part, the motives for capital investment centers around expansion of product lines and the replacement or maintenance of capital assets. Companies may choose to expand a production facility or expand into new products or industries. This could happen by acquisition or done organically based on their expertise in their existing products. Either method requires a significant amount of capital.

At the same time, their existing assets continually need attention so that they can maintain peak production efficiency. This requires a great deal of maintenance activities which tend to require significant amounts of planning, variations in cost capture techniques, and financial reporting. This last point can be even more complex when you consider that the sources for the cost of the maintenance work might occur out of PM on a work order, PS on a WBS element or network activity, or CO on a regular internal order. Reporting and trying to enforce consistency between so many disparate sources is hard to do in situations that could use all three.

On top of this, capital projects in regulated industries have additional regulatory requirements. By regulated, I’m referring mostly to the utilities, pipeline, and telecommunication industries. Here in the US, they are regulated by the Federal Energy Regulatory Commission (FERC) and the Federal Communications Commission (FCC) and must meet the reporting and financial coding requirements as dictated by these groups. This is on top of the normal US GAAP compliance reporting requirements.

Problem

As mentioned earlier, there are multiple modules that can be used to capture the costs of capital activities. This gives SAP customers flexibility in choosing which solution best fits their needs but it can be confusing and difficult to manage in cases where different capital processes should go in each module. Capital maintenance should probably go through a work order but if it is complex enough, it should probably settle to a project for holistic CO reporting. Simpler capital purchases could probably go through an internal order and either settle directly to an asset or to a project for similar reasons as a work order.

The problem with this is that reporting becomes more complex. From a fixed asset perspective… which is the final cost receiver for all of these items… it is extremely difficult to track the type of costs being capitalized which can have negative impacts on regulatory reporting and tax.

Another issue is that the regulated industries make a distinction between when the work is being planned versus complete. In between those two points in the job is an extra phase where the capital work is complete and depreciation can start. This is referred to as Construction Complete Not Classified (CCNC). This extra phase in the asset capitalization process is unique to the regulated industries.

Solution

To counter these issues, SAP has released SAP Asset Lifecycle Accounting (ALA). It is only released for United States customers and is geared for the regulated industries that face these requirements. It provides the following significant benefits.

First, it enables a much tighter integration between the work management processes and Asset Accounting (FI-AA). After working with ALA for the past three years, looking at a standard PS-to-Asset scenario looks far too simplistic to me. With ALA there is far greater determination for how the assets are created and with what attribute values, how the postings are made, how settlement rules are automatically determined, and how the cost object is closed out.

ALA also automates nearly all asset activity based on the events occurring on the work order side. I’ll cover more details later but there is no need to manually create assets or settlement rules. All of the downstream activity from the work order (or other cost object) is automated.

The regulated industries have specific requirements around calculating theoretical reserves using asset life curves (Iowa Curves). ALA supports this by calculating a theoretical net book value that is different than the traditional asset net book value that SAP calculates. ALA is also able to maintain/calculate different forms of depreciation reserve amounts. ALA handles this by delivering a Reserve Ledger to track the different forms of depreciation components in far greater detail then the asset value table in standard FI-AA.

ALA provides a series of process improvements and reporting capabilities to meet the specific reporting requirements of the regulated industries. This comes in the form of classifying work as either planned versus as-built and separate asset cost and reserve ledgers to track the components of an asset’s value.

ALA also tracks quantity changes on the asset record. In a way, it is able to take a simple numeric attribute on the asset and transform it into a transactional update which can be more easily reported on.

Standard capital accounting in SAP ERP tracks the inbound asset under construction process (CWIP) but ALA is able to handle the related Retirement Work In Process (RWIP) scenario as well.

Core Components

I’ll cover some of the details in subsequent blogs but wanted to close out with an overview graphic that best summaries the core aspects of ALA and how it integrates with the rest of ERP.

First, costs are captured in CO. For most regulated customers, capital activities are captured on a work order in PM but ALA also supports regular internal orders, WBS elements, network activities, and network activity elements.

Once the cost object has been created and the work approved… or at any other time that you determine… ALA is engaged and creates an Asset Request (AR). The asset request follows SAP’s document principle and captures all ALA related items about the work being done. It can have multiple Asset Events to track the unique types of work being performed.

Against these events, different types of assets can be assigned and created automatically if necessary. I’ll cover these in detail in subsequent blogs but ALA supports not just the simple AuC but also a CCNC asset (Construction Complete, Not Classified), Reserve asset, and the final capitalized PIS asset (Plant In Service).

The costs from PM/PS/CO are settled automatically to these records as necessary and further reporting details are captured in ALA in the Cost Ledger and Reserve Ledger. These reports reconcile to the existing asset records and reports in standard FI-AA. In addition, depreciation is recorded at the asset level which is currently not supported in ERP.