In this article we will try to explain the basic configurations for the accounting of leasing contracts with SAP RE-FX.
Introduction: A lease is an agreement between two parties for the temporary use of an asset in return for payment. Leases can cover all types of assets, from real estate such as office buildings to equipment such as machinery and vehicles. A lease agreement sets out the key terms for each contract and is signed by both parties: the lessor and the lessee.
IFRS 16: As of January 1, 2019, IFRS 16 requires a single lessee accounting model and requires lessees to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset has a low value (less than USD 5,000). The standard provides detailed guidance on how to assess whether a contract is a lease, a service or both.
IFRS 16 Terminology:
Lessor vs. lessee: The lessor is the company that owns the asset to be leased, while the lessee is the entity that pays the lessor for the use of the asset. Right of use (ROU): The right of use is the lessee's right to use an asset over the term of a lease. Lease liability: A lease liability is the financial obligation for the payments required by a lease, discounted to present value. A lessee measures the lease liability as the present value of the lease payments not yet made at the reporting date.
Effects on the financial process:
1/ ROU and lease liabilities - The ROU should be shown as a separate item. - The lease liability must be shown separately. 2/ Depreciation and interest - The depreciation of the right-of-use asset must be recognized. - Interest expense should be recognized. 3/ Cash flow - Lease liabilities settled with cash flow must be recognized.
IFRS 16 in SAP:
Two different SAP solutions can support IFRS 16 requirements: - Lease management through Nakisa. - Flexible Real Estate Management (RE-FX).
In this article, we will explain how to use RE-FX for lease valuation under IFRS 16.
SAP CLM can be used in conjunction with RE-FX to simplify the leasing solution landscape by: - Real-time valuation of finance leases - Eliminating financial interfaces - Reducing the number of applications in the system landscape
Multiple analytics FIORI apps and embedded analytics are available for lease management and no additional license is required.
So, let's now dive into the system configuration for lease accounting with SAP RE-FX get in.
Basic setting for lease accounting:
- Activate RE-FX in your control area: First of all, the RE-FX-extension must be activated in the system. To do this, go to the IMG menu: Flexible property management (RE-FX) => Basic settings => Activate properties in the control area
- Activate the contract valuation: Then we should activate the sub-function for the contract valuation, for this we should follow the IMG menu: Flexible Real Estate Management (RE-FX) => Basic Settings => Activate sub-function
- Manage the RE-FX basic settings in the company code Next, we need to go to the IMG menu: Flexible Real Estate Management (RE-FX) => Basic Settings => Make Basic Settings in Company Code
You should fill in the three columns:
Company code: Add the company code in which you want to activate the function. CCTp: Select the company code manager if the property belongs to your company. Accounting system: If the accounting system is SAP, select FI. Keep the company code optional for input tax (For each company code, you must specify in the customization whether the company code is optional).
Now the basic settings have been defined, we can move on to balance sheet valuation.
Balance sheet valuation:
- Valuation First, we need to define specific balance sheet valuation settings for each contract type. To do this, go to the IMG menu: Flexible Real Estate Management (RE-FX) => Balance sheet valuation of contracts => Control setting for each contract. WSelect the company code and choose the application object: REGCOE (valuation only) and integration type (Asset Accounting => For full integration with Asset Accounting). You can select a reference interest rate that can be used by default (LIBOR, EURIBOR ...).
- Measurement relevance: As explained in the introduction, under IFRS 16, leases with an initial value of less than EUR 5,000 should be excluded; the same exception applies to leases with a term of less than 12 months. Go to the IMG menu: Flexible Real Estate Management (RE-FX) => Balance Sheet Valuation of Contracts => Valuation Relevance. We should add new valuation relevance: LEWVALEASE: Lease contract with low value. SHORTLEASE: Short-term lease. Both should not be relevant for lease accounting.
- Valuation rule: The valuation rule is one of the most important configuration points for controlling all valuation rules and bookings for leasing. To do this, go to the IMG menu: Flexible Real Estate Management (RE-FX) => Balance Sheet Valuation of Contracts => Valuation Rule We can use the IFRS16 valuation rule or copy it if we want to change it.
Select your IFRS16 accounting principles in the valuation rule.
Valuation parameters: Select the valuation type: Balance sheet capitalization (Used for IFRS and US-GAAP) and Valuation group: Condition types for valuation according to IFRS16.
BS Capitalization parameters
Select the linear type for the linearization parameters: From open period (linearization) From open period (linearization): The date of the first open period of the linearization cash flow is used as the new start date. As a rule, linearization is not changed retroactively. However, if a contract is terminated or conditions are changed so that all periods are already posted on the contract end date, the calculation determines the remaining value and posts this value retroactively as a one-off adjustment to the contract end date if necessary. From start: The original start date of the calculation is always used as the calculation start date. All posted linearization rates are always corrected retroactively and distributed over the entire calculation interval. From the start of the analysis period: The start date of the analysis (which can be a future date) is used as the new start date. Retroactive changes to relevant conditions can also lead to retroactive corrections to the linearization. From open period (payments): The first open period of the partner cash flow is used here. For the classification, select: ROU approach (straight-line amortization of the right of use).
Finally, we should manage the flow types, flow types are very important, they are the key points for all generated bookings:
River type Acquisition: This flow type is transferred to the cash flow for asset transactions (acquisition and write-offs) in FI-AA Depreciation flow type: This flow type is transferred to the cash flow for depreciation transactions (depreciation and write-up) in FI-AA. Payment flow type: This flow type is transferred to the cash flow for cash flows from the lease liability. River type Interest: This flow type is transferred to the cash flow for interest transactions on the lease liability. NB: The general ledger accounts to be used are derived from this flow type.
Company code assignment:
Once the valuation rule is defined, we should assign the company code and the IFRS depreciation scope that should be used to post IFR16 (depreciation scope linked to IFRS accounting principles)
Contract type assignment:
The contract type for lease accounting should be assigned to the valuation rule.
4. valuation object-dependent control parameters (integration with AA):
Valuation objects control the integration with asset accounting, in this step we should specify the asset class in which the ROU is created. To do this, go to the IMG menu: Flexible Real Estate Management (RE-FX) => Balance Sheet Valuation of Contracts => Valuation Object Dependent Control Parameters.
Valuation parameter control (AA integration)
Select the object type: J4 (contract object), object type can be a property, building, equipment or contract object. Distinguishing criterion Name: For example, property, machinery or vehicle. Select Distinguishing criterion 01: Building. Select Contract type: RE (RE-FX leasing) Value determination value: The value determination value is later used for all leasing postings. In the asset determination and class type, select the appropriate asset class (you should create the special asset class for leasing).
5. assignment of asset transaction types (AA integration)
Now we should classify business transaction types and assign the corresponding RE flow type to them. IMG menu: Flexible Real Estate Management (RE-FX) => Balance Sheet Valuation of Contracts => Assign Asset Transaction Types
Assignment between flow types and asset transaction types
We should link all the following processes:
A = Acquisition B = Credit in the year of acquisition C = Credit in the following year D = Depreciation (on acquisitions of the current year) E = Depreciation (on acquisitions of the previous year) N = Derecognition (from acquisitions of the current year) P = Reactivation R = Derecognition (from acquisitions of the previous year)
6. account determination
Next, we should configure the settings for the account determination. The account determination is used to control postings based on flow types. Account determination procedure The flow type is first used to set up the posting data set. The accounts to be used are initially represented by account symbols. On the Replace account symbols screen, you define how the account symbols in the posting run are to be replaced by accounts from financial accounting.