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, 1^st 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:

Income Statement Impact:

Effect on the Lessee’s Balance sheet of:

Increase           Lease Assets

Increase           Financial Liability

Decrease          Equity

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.

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%.

New Asset recognition for operational Lease

Liability Present for the Operating lease

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.