SAP S/4HANA Cloud for Contract & Lease Management – simplify and lower the cost of complying with the new lease accounting standards
In January 2016, the International Accounting Standards Board (IASB) and the Financial Accounting Standard Board (FASB) published their respective new lease accounting standards.
IFRS 16 and FASB ASU Leases Topic 842 will revolutionize the way leases are accounted for.
An estimated $3 trillion dollars of lease commitments will come onto the balance sheets of the global companies that will be impacted by the transition to these new standards.
Where are these 3 trillion dollars coming from? The $3 trillion was ‚hidden’ in the form of operating lease obligations.
Under the previous regulations (IAS 17 and FAS 13), operating leases were ‘off-balance sheet’ and were only featured in the footnotes of companies’ financial statements.
The big change is that operating leases need to be to be included in a company’s balance sheet.
Operating leases are very similar to debt, they represent the contractual based payment companies will be obliged to make in the future to rent things like equipment and real estate they use to run their business.
The new accounting rules require companies to include operating lease commitments as part of their reported debt and assets.
The new lease accounting standards will make it easier to gain an accurate understanding of a company’s real financial position, lease liability and outstanding assets.
The deadlines for implementing the new regulations are 1st of January 2019 for IFRS 16 and 15th of December 2018 for FASB ASU Leases Topic 842.
Who is affected?
Every IFRS and US-GAAP reporting company renting real estate or leasing equipment will be impacted by the new standards.
Most affected will be large companies that have large operating lease obligations.
What’s the solution?
The S/4HANA Cloud for Contract & Lease Management is natively built on SAP S/4HANA Cloud, being based on SAP Flexible Real Estate Management (RE-FX).
The solution was specifically created to help customers simplify and automate the compliance with the new lease accounting standards IFRS16 and ASC842.
With the S/4HANA Cloud for Contract & Lease Management customers can standardize their lease-in, lease-out and service contract management activities for real estate, as well as for machinery, equipment, vehicles and computer hardware.
Customers have the flexibility to define additional contract objects via self-service configuration UI’s (SSCUI’s).
The S/4HANA Cloud for Contract & Lease Management also supports customers to create and maintain sublease contracts that are enabling inter-company and external leasing scenarios for complex leasing processes that comply with the new regulations.
The solution has three main components: Contract Management, Valuation and Classification and Multi-GAAP Posting.
Within the Contract Management component, customers can create and maintain contracts of their leased assets and gain full control and visibility of leases and critical dates.
Customers can assign existing business partners (created automatically in FI), enter the terms and conditions for notice and renewal options, assign the contract object and add the contract conditions. (payment plan, such as lease payments and service fees for lease contracts)
Customers can also add critical contract dates, for example reminders to check the contract validity or check the renewal options.
The adjustment of conditions is possible, such as Consumer Price Index adjustments or free scale adjustments that enable customers to make adjustments at contract level or condition level as needed.
The solution also includes multi-currency as part of the conditions for contracts that are in a currency that differs from the local currency of the company code.
Customers can run reports of existing contracts as part of daily business that will help them save time and effort and make more informed lease management decisions.
After customers create a contract, they will perform the Valuation and Classification, and the solution will automatically calculate and post the valuation cash flows based on the GAAP assignments.
The payment plan for a lease contract is represented by the contract cash flow created based on the contract conditions. The contract cash flow is directly integrated with the posting processes in SAP S/4HANA Cloud, .
With the Multi GAAP Posting feature, the solution will calculate and post the financial entries for the Right of Use asset, liability, liability reduction and interest.
The Periodic Posting function posts the flows that results from the conditions on the contract.
The systems will post the condition amounts directly in the vendor and customer accounting.
The Contract valuation processes are directly integrated into asset accounting in order to manage the Right-of-use asset.
The integration between the contract valuation and asset accounting includes the automatic asset creation from the valuation rule and the postings in FI-AA based on values from the contract valuation process (e.g. for depreciation).
As S/4HANA Cloud for Contract & Lease Management is a deeply integrated sub-component of SAP S/4HANA Cloud finance (Profit Center, Cost Centers, Assets, Functional areas etc.) it cannot be used as a standalone solution, independent from the SAP S/4HANA Cloud Financial Accounting.
The solution is delivered in the parallel ledger, allowing customers to do the reporting in both the local GAAP, as well as IFRS & US GAAP.
Integration between the S/4HANA Cloud for Contract & Lease Management and SAP Cloud for Real Estate
The SAP S/4HANA Cloud for Contract & Lease Management is integrated with SAP Cloud for Real Estate, a solution that is built on the SAP Cloud Platform.
While S/4HANA Cloud for Contract & Lease Management provides a solution for managing contracts for leased assets, SAP Cloud for Real Estate is offering centralized information for the real estate portfolio of an organization, helping customers to gain insights into their real estate landscape, like space utilization, facility costs and portfolio composition.
SAP Cloud for Real Estate customers can optimize their real estate portfolio with Location Management by better managing space, quickly evaluating the financial performance of the building, and understanding the physical characteristics of each location.
The S/4HANA Cloud for Contract & Lease Management will help customers lower the cost of complying with the new lease accounting standards by providing a solution that will help to accelerate leasing processes and automate recurring lease administration activities.
To get a more in-depth look at what is available for S/4HANA Cloud for Contract & Lease Management with the latest release of SAP S/4HANA Cloud, please check the SAP Best Practices Explorer. and the scope items that belong to the solution: