IFRS16 – Lease standard SAP Solution through Real Estate Management
In January 2016, the IASB (International Accounting Standards Board) issued IFRS 16 Leases.
IFRS 16 sets out the principles for recognition, measurement, presentation and disclosures of leases. It replaces the previous standard IAS 17 and will become mandatory from 2019 Financial year, 1st January 2019.
Read more on the IFRS 16 Accounting standard:
Financial statement impact – Before and after IFRS 16
Balance sheet Impact:
IAS 17 | IFRS 16 | ||
Finance Lease | Operating Lease | All Leases | |
Assets | XX | No record | XX (finance+ Operating Leases ) |
Liability | XX |
Income Statement Impact:
IAS 17 | IFRS 16 | ||
Finance Lease | Operating Lease | All Leases | |
Revenue | |||
Operatingcosts (excluding depreciation and amortization ) |
XX ( Operating Lease Expense ) | ||
Depreciation and Amortization | XX ( Deprecation ) | ||
Finance Cost | XX ( Interest ) | ||
Profit before Tax |
Effect on the Lessee’s Balance sheet of:
Increase Lease Assets
Increase Financial Liability
Decrease Equity
Matric | Measure | Effect |
Leverage | Solvency | Increase |
Asset turnover | Profitability | Decrease |
EBIT/ Operating profit | Profitability | Increase |
EBITDA | Profitability | Increase |
With New accounting standard IFRS16: Companies are required to recognize a right-of-use asset and a lease liability for almost all type of lease contacts. (With few exceptions for law value lease).
Lease contract: Acquisition of a right to use as underlying asset in exchange of lease payment.
Effect: Substantial increase the amount of recognized financial liabilities and assets for companies that have a significant amount of lease contract currently classifies as operating lease.
Eg: IFRS Lease Example for leased building for 3 years.
Period | 1 | 2 | 3 | Total |
Lease Payment ( year payment in arrears) | $11,000 | $12,000 | $13,000 | $36,000 |
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 arrears) | $11,000 | $12,000 | $13,000 | $36,000 |
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 – Interest) | $9,081.67 | $10,626.57 | $12,264.16 | $31,972.20 |
Residual value at End of Period-RVEP (Ex: Y1: 31,972.20-Interest) | $22,890.53 | $12,263.96 | -$0 |
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.
- 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:
- 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.
- Define the customization setting for valuation process. (Valuation principle, valuation rule, account determination, ect.)
- 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
- If business is currently using the real estate (RE) new functionality can be used additionally.
- SAP Note: 2255555 valuations for leasing contacts
- 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
- 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.
Nice work.
Hello Luis,
Nice work... the same thing i am looking for Sub - lease scenario linked with lease in contract (Head lease), we have a requirement where their is a lease in contract and the same contract we given on sub - lease.
for example : one building having multiple stores ( like 5 stores).. ( 2 stores for own purpose and other 3 on sub - lease).
cloud you please help on the same financial entries. i am facing one more issue in the linking sub lease with main head lease contract. i assign the main contract no. ( Head lease ) in sub lease contract. but i am unable to see " Object relation ship " in object tab as per the note (2662137 point no. 12 and note 2406475)
Thanks in advance
@Kesharika Goonawardena It's really helpful. But you missed accounting treatment and suggestion for PrePayment/Advances in contracts. Can you please provide details about how it can cater? Really appreciate.
Regards
Umer
Is there any configuration guides/documents for contact and lease management (REFX-CLM) for ECC. We are trying to implement CLM on ECC 6.0 EHP7.
thanks for your efforts
hope to provide practical example for Workaround solution of not implementing the SAP RE-FX
Thank you for this great articles, keep sharing with peoples arround the world Mrs. Kesharika Goonawardena
Thank you for such a great article. Appreciate it!!!
Regards,
Thank you.
Can you please elaborate on 'amortization' mentioned in table in case of lease assets as we are already reducing the cost in terms of depreciation.
Regards
Hi,
We have an issue with valuation via tcode RECEEP. Is there a way to do a valuation for an asset with value date from August of 2019 and the posting date that will be used would be for January 2020. We have encountered an error that an Asset value date should be the same as the posting fiscal year.
Very nicely Explained.
2 Questions
Thanks
Ani
Thanks for insights and very good summary