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Author's profile photo Kesharika Goonawardena

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:

https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/reporting/factsheet-ifrs16-leases.pdf?la=en

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.

  1. 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:

  1. 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.
  2. Define the customization setting for valuation process. (Valuation principle, valuation rule, account determination, ect.)
  3. 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

  1. If business is currently using the real estate (RE) new functionality can be used additionally.
  2. SAP Note: 2255555 valuations for leasing contacts
  3. 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
  4. 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.

Assigned tags

      11 Comments
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      Author's profile photo LUIS ALBERTO FULLEDA CACERES
      LUIS ALBERTO FULLEDA CACERES

      Nice work.

      Author's profile photo Mohammed Taqi Ahmed
      Mohammed Taqi Ahmed

      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

      Author's profile photo AIG Functional Team
      AIG Functional Team

      @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

       

      Author's profile photo Anand Adayappurath
      Anand Adayappurath

      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.

      Author's profile photo Mohamed Bashir
      Mohamed Bashir

      thanks for your efforts

      hope to provide practical example for Workaround solution of not implementing the SAP RE-FX

      Author's profile photo Muhammad Hasan Mufid
      Muhammad Hasan Mufid

      Thank you for this great articles, keep sharing with peoples arround the world Mrs. Kesharika Goonawardena

      Author's profile photo Umesh Gothankar
      Umesh Gothankar

      Thank you for such a great article. Appreciate it!!!

      Regards,

      Author's profile photo Shanid Meethale Purayil
      Shanid Meethale Purayil

      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

      Author's profile photo SAP L2 Support
      SAP L2 Support

      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.

      Author's profile photo Anirudh Thakkar
      Anirudh Thakkar

      Very nicely Explained.

       

      2 Questions

      1. Do we require SAP RE-FX  - Seperate Licence
      2. Are there any recommended SAP Add On Partner which can be used. This question is because if SAP RE-FX has a licence cost than why not to evaluate add ons if any.\

      Thanks

      Ani

       

      Author's profile photo Maxim Behm
      Maxim Behm

      Thanks for insights and very good summary