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.

Next Steps

Watch this site for more information and examples of how SAP Real Estate Management will help leasing and accounting departments run simple.