Real Estate IFRS 16 Management Solution

OVERVIEW

Zimele’s Real Estate IFRS 16 Management solutions provides a completed and accurate IFRS 16 Lease Accounting Solution.

The new leasing standard will transform accounting, corporate Real Estate Management, tax procurement, etc. business processes to comply with the new IFRS 16 accounting standards.

Currently operating leases are not reflected on a company’s balance sheet. Majority of a company’s leases are designed as operating leases. The flexibility to design leases as operating leases or finance leases gave companies an option to hide their financial obligations on the balance sheet. Therefore, boards had concerns about the lack of transparency of information about lease obligations for investors.

The new accounting standards IFRS 16 determine that lessees will no longer distinguish between finance leases which are recognized on the balance sheet and operating lease contracts which are not recognized on the balance sheet. With the new accounting standards, companies are required to recognize a right-of-use asset and a lease liability for almost all types of lease contracts with few exceptions. This is based on the principle that a lease contract is the acquisition of a right to use an underlying asset in exchange of lease payments.

The new accounting standards will have a big impact on the balance sheet and the performance metrics of lessees. The sum of lease assets will increase significantly which leads to an increase in the balance sheet total. This increase of lease assets is tied directly to the financial liabilities which therefore also increase significantly.

BENEFITS

Utilizing the Bronze package will give business the following benefits:

  • IFRS 16 will result in a more accurate representation of an organization’s assets and liabilities and improve the overall transparency.
  • It will reduce the need to adjust amounts on reported lessee amounts on balance sheet and income statement
  • Companies providing ‘non-GAAP’ information about leases will be diminished.
  • IFRS 16 provides a more affluent set of information and it will give greater insight into a company’s operations.
  • Improve comparability between companies that lease assets.
  • Create a more level playing field in providing transparent information about leases.
  • Organizations will be able to accurately measure assets and liabilities arising from leases.

WHO CAN BENEFIT?

The Lease Accounting solution will benefit clients who want to:

  • Accurate lease accounting calculations for Landlord and Service Provider contracts
  • IFRS 16 compliance

CORE FEATURES

The IFRS 16 solution includes the following components:

Lease Management

Contracts in SAP Real Estate Management is used to represent lease agreements. Different contract objects, such as real estate objects (buildings, land, rental spaces etc.), cost centers (internal cost center management), contract objects and business partners (customer, vendor, supplier etc.) are assigned to these contracts. Contract conditions and the valuation rules related to these conditions are the precondition for the creation of payment plans based on cash-flow items for the contracts.

IFRS 16 (linearization and local accounting principles) functions include the use of accounting principles for specific valuation purposes, the calculation and display of valuation cash flows, and the direct integration into asset accounting to manage the right of use asset. Native SAP Finance integration functionality is enhanced with functions for multi-GAAP postings. There are additional transactions for the processes of contract valuation and update.

As part of the extension a new cash flow for the valuation process on the Lease Contracts is used. It is called the valuation cashflow. The valuation cashflow represents the basis for the contract valuation process whereas the partner cash flow is responsible for the partner-related postings (postings on vendor accounts).

The determination of the asset class of the right-of-use asset (to be created for the leased object) is dependent on the object defined on the contract. If the asset class cannot be determined a combination of contract types and object types are used to the derived the asset class.

Lease Contracts will be processed with the contract processing transaction (transaction – process contract). Contract managers/admin will be responsible for the general contract information such as term, charges, notifications etc. and the accountants will be responsible for valuation-relevant contract data (transaction – Edit Contract Valuation).

Valuation Data and Contract Conditions

The valuation data for a lease contract must be defined. The relevant valuation rules for the contract must be entered and assigned to the contract conditions. Afterwards it must be checked whether there are further conditions which are necessary for the contract valuation. These conditions must be entered as statistical conditions.

If the valuation information of the lease contract is completed, the valuation process can be started. After the analyse of the valuation results the valuation postings run can be started.

In addition to the contract conditions there are other fees which are relevant for the valuation process, but not relevant for payment, for example, initial costs for the lease contract. These costs can be represented as statistical conditions. In case of statistical conditions, no cash-flow items are created, therefore such conditions are not relevant for periodic postings but will be used for valuation purposes. Depending on the configuration considerations several contract conditions will be valuated together.

As mentioned in section 5.2 the transaction for processing of lease contracts is the standard contract transaction (RECN). The two defined transactions will have different authorisations the standard contract is used for general lease agreement information and postings to the partner cashflow. The second transaction is for accounting personnel, it will be responsible for the valuation data and the balance sheet.

SAP Real Estate Management must be extended with valuation functionality. In this case, the existing contracts can be enhanced with additional registers and functions related to the valuation-relevant data. Therefore, it is not necessary to use other contract types or to migrate the existing contracts.

Contract master data contain an attribute defining the valuation relevance of a lease contract. The available field values for this field can be freely defined by the customer during the customising process. The valuation relevance field can the used for reporting purposes.

If a contract is not relevant for the valuation process the valuation tab of the contract is hidden while processing the contract in the system.

Valuation rules

For the valuation of lease contracts, different accounting principles can be used. In the contract data, different valuation principles (for example, IFRS GAAP) are represented by different valuation rules. These valuation rules in combination with different contract conditions, objects, terms, posting parameters and frequency parameters define the basis for the valuation process.

If no accounting principle is assigned, the default accounting principle will be used. In the case that no transfer posting valuation rule is defined for the payment cash flow, the cash flow items will not be accrued/ deferred. For accruals and deferrals of object cash flow items the default accounting principle will be used. Valuation cash flow items for transfer posting rules usually will be accrued/ deferred using the accounting principle of the corresponding cash flow item, whereas valuation cash flow items for activation and/or linearization valuation rules are no objects of accruals and deferrals. For these items and valuation rules, the clearing account represents the accruals and deferrals account.

The capability to assign condition types to valuation groups (IFRS, US-GAAP) will ensure that the valuation process considers all accounting principles. The assignment of condition types to condition valuation groups also includes information about the following:

  • The relevant external condition purpose (for example, actual or statistical rent)
  • The valuation property to be used
  • The consideration of this condition during the valuation process.

If payments for contracts have already been posted in advance it should not be posted again in SAP Real Estate Management. To include the already posted cost a one-time statistical condition is used to include the necessary payments in the RoU asset value calculation.

The consideration of a contract condition in the valuation process is performed depending on the classification. Parallel to classification can be defined whether a condition is relevant for the valuation or not.

Transactions of the valuation information system, such as valuation rules in contracts and condition-specific valuation rules for contracts will be used for mass maintenance of valuation rules. Using maintainable list viewer reports, valuation rules and conditions in relation to the relevant valuation rules can be inserted, changed, or displayed.

Contract Valuation

As part of the contract valuation process, we will demonstrate the valuation cash flow, it’s structure and the information system used.

The process of contract valuation is influenced by different events during the contract lifetime. Adjustments of contract conditions influence the contract valuation as well as changes in the contract duration, changes of contract terms, or changes of contract objects. Each of these change events trigger changes in the status of valuation data and therefore changes in the valuation process for the related contracts. These changes for their part effect payment postings and valuation postings.

Standard periodic posting is used for the posting of the partner and object cash items. This transaction is used also for lease contracts and therefore remains unchanged. For lease contracts relevant for valuation, the object cash flow is no longer used for the posting process. The object cash flow is replaced by the valuation cash flow. The valuation cash flow is posted using the new developed posting transaction RECEEP. This transaction can be used for the posting of pending cash flow items with the assigned contract-specific accounting principles.

During the periodic postings process, posting documents for all relevant ledgers are posted, whereas during the valuation postings process only the ledgers with relevance for the present valuation rule are posted.

Valuation results

The example showcasing the valuation results for the first year shows the posting of lease payments which are posted against the vendor account using the lease clearing account in all defined ledgers. This is the setup that will be implemented as part of the SAP IFRS16 extension for the existing SAP Real Estate Management modules.

The calculated values are displayed on a dialog box when simulating the contract valuation. On the first tab, the acquisition posting is displayed. The status icon indicates if the posting has already been made.

The payment tab shows all relevant leasing payments. The status icon displays if the posting has already been made.

Inside the table, the calculation period is displayed with the number of days used to the calculation (30 days for every month/360 days per year or the exact number of days). The number of days per month is taken from the frequency term of the contract.

The account determination for valuation posting processes both balance sheet and profit and loss. In detail, the following accounts must be considered:

Asset Accounting Integration

In this section we will be looking at the native integration functionality between SAP Asset Accounting and SAP Real Estate Management, we will also demonstrate the connection and how the IFRS 16 valuation process affects the asset values.

The asset is linked to the contract in SAP REFX. The contract that is assigned to the asset can be view on the asset record under the “Object related to asset” section. The value of the posting contract is recorded against the asset value.

During the Contract Valuation, the system calculates the depreciation values according to the Valuation Rule. The Calculation Method contained in Depreciation Key for the Asset Class determines that the depreciation values are calculated externally. After posting the Contract Valuation to the Asset, the calculated depreciation values are visible as Planned Depreciation in the Asset Values. The actual posting of the Planned Depreciation is done via the normal Depreciation Run in Asset Accounting.

Useful life of the asset is update based on the lease terms.

The following transactions will be available for reporting purposes:

  • Valuation rules in contracts: creating and changing valuation rules using mass maintenance
  • Condition-specific valuation rules for contracts: creating and changing condition-specific valuation rules using mass maintenance
  • Display contract valuation: Valuation logs and valuation results for acquisition, depreciation, payment, interest and special flows can be displayed from here as well. For the selected contracts or valuation identifications process data or the valuation cash flow based on periods can be listed.
  • Valuation cash flow: The report displays the relevant current cash flow set together with other valuation-relevant information (for example, opening and closing stocks of the fixed asset and of the leasing liability)
  • Valuation process: This report shows the status of the valuations.
  • Valuation postings: This report will be used to exhibit the current posting summaries.

Valuation Properties

In this section we will be describing the special cases for condition valuation. Examples for the special condition valuation properties are available:

  • Initial cost
  • Rent incentives
  • Asset default values
  • Residual values
  • Different end of usage date
  • Asset retirement obligations
Initial Costs

Initial costs occur when the contract is concluded for example admin fees or broker fees. These amounts increase the value of the asset at the time of capitalization. All initial costs are either assigned to the one-time statistical posting or to the one-time posting external condition purpose. The total amounts of these one-time conditions form the initial costs that increase the asset value.

The described initial costs form part of the valuation cash flow item, which transfer the costs for specific accounting principles. The initial cost referred to is shown on a special flow tab on the valuation result. The initial cost increases the value of the RoU.

Rent Incentive

Rent incentive granted by the lessor, the contract valuation will be influenced. Just as with the initial costs a rent incentive will only affect the value of the Right-of-Use asset and leaves the liability untouched. The Right-of-Use will be lower than the Liability by the value of the rent incentive.

A rent incentive is shown on the special flow tab of the valuation result. The rent incentive directly decreases the overall Right-of-Use value in the same amount.

Asset Value

The system can calculate with a given Right-of-Use default value; this value can be specified as a condition (statistical one-time condition). The delta between Right-of-Use and Present Value of the Lease Liability will lead to a Positive or Negative Equity Change. The system automatically creates a posting for the Liability difference which can be seen in the Valuation Cash Flow.

Asset Retirement Obligation

If there are any asset retirement obligations for the lessee, those obligations must be considered for the calculation of the Right-of-Use value. Asset Retirement Obligations do not impact the calculation of the Liability.

The Asset Retirement Obligation condition defines are to be applied for a retirement and increase the net worth value. Asset Retirement Obligations are shown as special flow on the special flow tab.

End of Usage

The End of Usage date for the Right-of-Use asset can be set manually when assigning the Valuation Rule parameters. If no End of Usage is specified, the system will automatically calculate with the end of the contract term. If the End of Usage has been set to an earlier date than the end of the contract term, the system will use the manually set end of usage date as valuation period.

Right-of-Use and Liability do not develop in the same way when the End of Usage is changed to an earlier occurrence. This leads to a liability difference which is displayed on the Special Flow tab of the Valuation result.

Residual Value

Residual Value is assign to the Leasing Contract. Residual Value defines the amount of open Liability at the end of the contract term.

The Residual Value does not influence the Right-of-Use or Depreciation calculation. The Residual Value can be specified using a statistical one-time condition with the corresponding Valuation Property. The valuation cash flow shows that the Liability at the end of the contract (in the closing balance of the last period of the contract term) is of the same amount as specified as Residual Value.