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Lease Accounting for Lessees with SAP Business ByDesign based on IFRS 16 / ASC 842

The objective of this blog post is to introduce lease accounting for lessees with SAP Business ByDesign based on IFRS 16 / ASC 842.

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) issued in 2016 a standard related to lease accounting: IFRS 16 and ASC 842. It affects companies that report under IFRS or US GAAP and are involved in leasing. It requires lessees to recognize assets and liabilities for most of their leases.

IFRS 16, Leases is effective for fiscal years beginning on or after January 1, 2019. The US counterpart ASC 842, Leases is effective for public business entities for fiscal years beginning after December 15, 2018 and becomes effective for fiscal years beginning after December 15, 2019 for all other entities.

For those not yet familiar with the accounting standards, we recommend acquainting yourself with the topic now. As a starting point, we have chosen some materials from different authors. You are welcome to share your sources as a comment to this blog.

The new feature consists of lease contract creation, valuation, and automatic right-of-use asset creation for leased objects and lease contract postings. Optional an automatic supplier invoice creation based on lease contracts is available.

Note: Lease Accounting is only available for selected customers taking part in the Lease Accounting Controlled Availability Program. If you want to take part in this program, please create an incident with medium priority, enter the prefix ‘IFRS 16 CA’ in the subject and a contact person along with contact details.

Once the program is successfully finished, all customers will be able to use it. 

Lease contract creation

Before you can create a lease contract, you need to scope Lease Accounting in your solution.

You can create a lease contract in the Lease Contract Management work center. Select the Lease Contract view and click on New.

In the General tab enter all required fields. The interest rate entered under Valuation is used to discount the outstanding payments and calculate the present value.

If the lease contract contains renewals, you can define them in the Options tab.

Note: Only enter renewals which are highly probable to be executed as they extend the contract end date and therefore influence the valuation.

In the Leased Objects tab, you can enter one or more objects that belong to this lease contract. You need to define an External Reference ID which is unique (e.g. a license plate) and the Object Type which is used for the right-of-use asset class and account determination. By the Relevance you can specify per leased object and set of books if an exemption is applied according to IFRS 16 (short-term lease or low value asset) and therefore post it as an Expense, or classify it is an Operating Lease or Finance Lease according to ASC 842. For each leased object a corresponding right-of-use asset will be created.

You need to define at least one lease installment under Conditions for a leased object. Lease Installment and Service Charge are recurrent payments. All other condition types, such as Initial Cost, IFRS Incentive and Penalty Payment are one-time payments.

In the Organizational Assignments you can assign each leased object either to a cost center or a project task. This assignment is copied over to the corresponding right-of-use asset.

When you entered all data, you can check the lease contract. If the check is successful, you can valuate it. Click on Actions and select Valuate. The valuation generates the Payment Schedule Lines and Valuation Cash Flow. You can view them by clicking on Reports and selecting them.

The Lease Contract Payment Schedule Lines report provides an overview of all recurring lease payments (lease installments or service charges) by due date.

The Lease Contract Valuation Cash Flow report provides an overview of all calculated valuation figures such as the net present value, the opening and ending balance of the right-of-use asset and the lease liability, the depreciation, the interest and the lease expense for each leased object. The amounts shown in this report are the basis for the Lease Contract Posting Run.

Calculations for the net present value, interest and depreciation is done daily. This means the number of days used to calculate depreciation and interest amounts for example for February are 28 (29), for April are 30 and for May are 31. The formula for discounting and interest calculation uses compound interest (exponential interest calculation). If rounding differences appear at the ending balance, the difference is added to depreciation or interest on the last due date.

This simple example shall explain the calculation a bit more in detail. The contract start date is 01.03.2018 and it ends after one year on 28.02.2019. The monthly lease installment is 1.000 Euro and paid at the last day of each month. The interest rate for discounting is 1%.

Present value calculation

Due Date Days act/360 Interest rate Discount factor Payment Present value
31.03.2018 30 0,0833 0,01000 0,999171149 1.000,00 999,17
30.04.2018 60 0,1667 0,01000 0,998342986 1.000,00 998,34
31.05.2018 91 0,2528 0,01000 0,997487938 1.000,00 997,49
30.06.2018 121 0,3361 0,01000 0,99666117 1.000,00 996,66
31.07.2018 152 0,4222 0,01000 0,995807562 1.000,00 995,81
31.08.2018 183 0,5083 0,01000 0,994954686 1.000,00 994,95
30.09.2018 213 0,5917 0,01000 0,994130017 1.000,00 994,13
31.10.2018 244 0,6778 0,01000 0,993278577 1.000,00 993,28
30.11.2018 274 0,7611 0,01000 0,992455298 1.000,00 992,46
31.12.2018 305 0,8472 0,01000 0,991605293 1.000,00 991,61
31.01.2019 336 0,9333 0,01000 0,990756015 1.000,00 990,76
28.02.2019 364 1,0111 0,01000 0,989989551 1.000,00 989,99
11.934,65

Valuation Cash Flow

Date Days Month Year RoU Asset
Opening balance Depreciation Ending balance
01.03.2018 3 2018 11.934,65 11.934,65
31.03.2018 30 11.934,65 983,63 10.951,02
30.04.2018 30 4 10.951,02 983,63 9.967,39
31.05.2018 31 5 9.967,39 1.016,41 8.950,98
30.06.2018 30 6 8.950,98 983,63 7.967,35
31.07.2018 31 7 7.967,35 1.016,41 6.950,94
31.08.2018 31 8 6.950,94 1.016,41 5.934,53
30.09.2018 30 9 5.934,53 983,63 4.950,90
31.10.2018 31 10 4.950,90 1.016,41 3.934,49
30.11.2018 30 11 3.934,49 983,63 2.950,86
31.12.2018 31 12 2.950,86 1.016,41 1.934,45
31.01.2019 31 1 2019 1.934,45 1.016,41 918,04
28.02.2019 28 2 918,04 918,04
Date Days Month Year Lease Liability
Opening balance Clearing amount Interest expense Repayment Ending balance
01.03.2018 3 2018 11.934,65 11.934,65
31.03.2018 30 11.934,65 1.000,00 9,90 990,10 10.944,55
30.04.2018 30 4 10.944,55 1.000,00 9,08 990,92 9.953,63
31.05.2018 31 5 9.953,63 1.000,00 8,53 991,47 8.962,16
30.06.2018 30 6 8.962,16 1.000,00 7,43 992,57 7.969,59
31.07.2018 31 7 7.969,59 1.000,00 6,83 993,17 6.976,42
31.08.2018 31 8 6.976,42 1.000,00 5,98 994,02 5.982,40
30.09.2018 30 9 5.982,40 1.000,00 4,96 995,04 4.987,36
31.10.2018 31 10 4.987,36 1.000,00 4,28 995,72 3.991,64
30.11.2018 30 11 3.991,64 1.000,00 3,31 996,69 2.994,95
31.12.2018 31 12 2.994,95 1.000,00 2,57 997,43 1.997,52
31.01.2019 31 1 2019 1.997,52 1.000,00 1,71 998,29 999,23
28.02.2019 28 2 999,23 1.000,00 0,77 999,23

Right-of-use asset creation

When you checked the Payment Schedule Lines and Valuation Cash Flow you can release the lease contract. Click on Actions and select Release. This action will automatically create a right-of-use asset per leased object and enables you to generate postings for the lease contract and object(s). You can navigate from the leased object to the right-of-use asset.

The right-of-use asset has the new depreciation method LEAS assigned. This depreciation method gets the depreciation from the lease contract based on the valuation cash flow. The useful life is calculated based on the contract start and end date.

Lease contract posting run

You can create a lease contract posting run in the Lease Contract Management work center. Select the Lease Contract Posting Run view and click on New and select Lease Contract Posting Run.

You can schedule the lease contract posting run to ensure that all related postings will be generated regularly. Or you can select lease contracts and generate all postings up to a given key date. If you select a key date type, the schedule action is disabled. In this case click Start Now to execute the run.

When you display the execution log you can find in tab Processed Successfully which postings were generated. The postings are separated by Initiation and Clearing postings. Initiation postings will be generated for the initial measurement (opening balances) at the contract start date, revaluations at the effective date of modification based on contract modifications or the right-of-use asset retirement at the contract end date.

Execution log for IFRS: Initiation

The right-of-use asset is capitalized, and the lease liability is also posted. In addition, Initial Direct Cost increase the acquisition cost of the right-of-use asset. The offset account for initial direct cost is the clearing account for lease contracts which is also used when assigning the corresponding supplier invoice to the lease contract.

Execution log for German GAAP: Initiation

For German GAAP no initiation postings are generated, because the lease contract is defined as Expense for this set of books. This means all lease payments are posted to expense accounts and can be displayed in the Clearing section.

Execution log for IFRS: Clearing

The Clearing section shows the posting for the lease payments. As the lease installment is paid in advance it decreases the lease liability at the beginning of the payment period. The offset account for lease payments is the clearing account for lease contracts which is also used when assigning the corresponding supplier invoice or the payment allocation to the lease contract.

With the next posting run at 30.04.2019, end of the payment period, the interest and the service charge are posted to expenses. The offset account for the interest is the lease liability which increases it (interest capitalization) and the offset account for the service charge is the clearing account for lease contracts which is also used when assigning the corresponding supplier invoice or the payment allocation to the lease contract.

Execution log for German GAAP: Clearing

All lease payments in this set of books are directly posted to expenses. As the lease installment is paid in advance it is posted at the beginning of the payment period. The offset account for lease payments is the clearing account for lease contracts which is also used when assigning the corresponding supplier invoice or the payment allocation to the lease contract.

With the next posting run on 30.04.2019 at the end of the payment period, the service charge is posted to expenses. The offset account for the service charge is the clearing account for lease contracts which is also used when assigning the corresponding supplier invoice or the payment allocation to the lease contract.

Depreciation postings

The depreciation of the right-of-use asset is executed by the Depreciation Run. You can create a depreciation run in the Fixed Assets work center. Select the Depreciation view under Periodic Tasks and click on New and select Fixed Asset Depreciation Run.

This short introduction of Lease Accounting shall help you to start using the new capabilities in SAP Business ByDesign.

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