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How SAP RE-FX makes you comply with the new IFRS16 Lease Accounting rules

How SAP RE-FX makes you comply with the new IFRS16 Leasing rules

As early as 2016, the International Accounting Standards Board (IASB) issued IFRS 16, replacing the in 2001 adapted IAS 17 Leasing rules (and in this context also IFRIC 4, SIC 15, SIC 27). IFRS 16 is effective for annual reporting periods beginning on or after 1st January 2019, with earlier application permitted (as long as IFRS15 is also applied).

With IFRS 16, it is no longer required to treat financial and operational leases differently from an accounting perspective and therefore this new leasing standard eliminates nearly all “off-balance” sheet accounting for leases. The goal of the new lease accounting rules is to increase transparency and to enable the users of financial statements to assess the impact of their organization’s leases on the financial position and cash flow directly from its balance sheet. To meet that objective, a lessee should recognize assets and liabilities arising from a lease.

In this blog post, you can read what steps you need to take to fully comply with the new Lease Accounting rules valid for accounting periods starting on or after 1st January 2019.

IFRS16 with SAP RE-FX

IFRS16 with SAP RE-FX

Book an onnline demo and find out how SAP RE-FX makes you compliant with the IFRS16 Lease Account rules

How to make your first steps with the new leasing requirements under IFRS 16

As a first step in preparing for 1st January 2019, I recommend you to check existing leasing contracts against the new IFRS 16 standard and identify if your contract contains a lease that should be reported differently under IFRS16. To help you in this assessment, I have created the following decision tree:

Decision tree to get started with the new leasing requirements under IFRS 16
Decision tree to get started with the new leasing requirements under IFRS 16

In case your contract contains a lease as defined in IFRS16, you should identify the lease and non-lease components of that contract, as the latter should be accounted for differently. Consequently, at the start date, the lessee shall recognize the Right-of Use (RoU) asset and a lease liability. The value of the RoU-asset is measured as the present value of future lease payments. This value is also impacted by lease payments made or incentives received before the contract start date, initial costs and the costs for dismantling or removal of the asset at the end of the lease term.

How to adapt your SAP ERP system to comply with the IFRS 16 Lease Accounting rules

In order to comply with the new IFRS 16 lease accounting standard, you need to adapt your 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. Therefore, it is possible to only implement the RE-FX contract management part and its accounting integration and later add further functions if desired. Click here to find out how we implemented SAP RE-FX at the German road construction company, Porr Oevermann GmbH, to make their SAP ECC system compliant with the IFRS16 Lease Accounting rules.

Basically, SAP RE-FX is a complete contract management solution. It enables you to set up different types of contracts, manage the business partners of your contract in the tool, keep track of critical dates in the contract life time and manage the contract conditions. This is all managed in a central contract database, so all involved parties in your organization will work on the same contract data. In this tool, the lease contract can be valuated according to different GAAP standards, enabling you to perform your local and your IFRS valuation. It calculates repayments, depreciations and the present value. Based on these calculations, posting are made directly in the SAP FI and SAP CO modules. Moreover, you can apply the multi-GAAP valuation as well for the ledger solution (New-GL) as for customers using the account solution (Classic GL).

The SAP RE-FX module also enables you to add ‘Statistical Conditions’ to your 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.

Webinar

Webinar

Learn how SAP RE-FX makes you compliant with the new IFRS 16 Lease Accounting rules. In the webinar recording, we will use a system demo to explain how you can bring your SAP ERP system into line with the leasing rules of IFRS 16.

Watch now

How to start your own IFRS 16 compliance project

Be aware that getting ready to comply with the IFRS 16 lease regulations is time consuming and don’t forget that also comparing figures are requested. So my recommendation is: “Start today instead of tomorrow”!

The following image shows the project roadmap we used at our customers to help them comply with the new IFRS 16 lease accounting standard:

Project roadmap for having your SAP ERP system compliant with the new IFRS 16 Lease Accounting standard
Project roadmap for having your SAP ERP system compliant with the new IFRS 16 Lease Accounting standard

SAP RE-FX Implementation at Porr Oevermann GmbH - Compliance with IFRS16 Leasing

IFRS16 vs. US-GAAP. What are the differences?

The changes in leasing regulations have started as a joint project between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). In the course of this project, however, significant differences between IFRS16 and ASC842 arose which dual-reporters have to take into consideration.

The most important difference is that US-GAAP still distinguishes between financial and operational leases. Both leasing types require the creation of a RoU-asset and lease liability. The different treatment can be found on the level of the depreciation for operational leases under US-GAAP, whereby the lease expense will be presented as a straight-line expense over the lease term.

Another important difference is the effective date, whereas IFRS16 will become effective as of 1st January 2019 and ASC842 is effective for annual periods beginning after 15th December 2018.

Other differences exist on the level of transition approach, the definition of a lease, exemption of low value assets, sale-leaseback transactions, subleases, etc. Please contact me at sofie.machiels@pikon.com to know more about the other differences. I am happy to help you.

Why SAP RE-FX is a future-proof solution for IFRS 16 Leasing

The SAP Flexible Real Estate module (SAP RE-FX) can be implemented in both SAP ECC and SAP S/4HANA. This module requires the use of the Business Partners functionality for recording your leasing contracts, which is a standard functionality in S/4HANA across all modules.

Depending on the timescale of your own SAP S/4HANA strategy, you can already implement SAP RE-FX in your current SAP ECC system. It is S/4HANA-proof and can easily migrated to your future SAP S/4HANA system. If you are already migrating to S/4HANA, the implementation of SAP RE-FX can also be a next point on your implementation roadmap.

Why SAP RE-FX is the preferred solution for SAP users to comply with the IFRS 16 lease accounting standard

  • Complete contract management in one central tool
  • Direct FI/CO integration
  • Business partner integration
  • Possible to valuate different objects in one contract with different conditions
  • Multi-GAAP accounting
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About the author
Sofie Machiels
Sofie Machiels
I am a SAP ERP Consultant at PIKON Benelux in Genk, Belgium with a strong focus on Finance and Controlling processes. I have more than 10 years of experience and enjoy travelling to our customers all over the world.

12 thoughts on “How SAP RE-FX makes you comply with the new IFRS16 Leasing rules”

  1. Dear Sofie,
    As I know RE-FX module handles the non-movables assets but what if a company has other type of leasing contracts for example software or microwave broadcasting contracts which are relevant for IFRS16 as well ?
    Is it possible to administrate these types of contracts in RE-FX ?
    Is it possible to calculate the proper depretiation values for these contracts as well ?

    Thanks in advance for your response.
    Kind regards
    Gabor

    Reply
    • Dear Gabor,
      Thank you for your question.
      The RE-FX Module can handle as well non-movable as movable assets. You can set-up a separate contract type for for example software and calculate the RoU assets and the leasing liability for this in the same way as for movables contracts.
      I hope this answers your question.
      Best regards
      Sofie

      Reply
  2. Hello Benni,
    The enhancements developed for the compliance with IFRS16 are available as from the implementation of a certain release stand and support level of one of the following components: S4CORE,100 SP3; SAP_FIN 730 SP4; SAP_FIN 720 SP5; SAP_FIN 618 SP3; EA-FIN 700 SP9; EA-FIN 617 SP12; EA-APPL 616 SP10; EA-APPL 606 SP17.
    Kind Regards,
    Sofie

    Reply
  3. Sofie,
    Do you know the different between RE-FX and SAP Lease Administration by Nakisa? Is Nakisa required to meet the new IFRS standards for equipment leases?
    Thanks,
    Jeff

    Reply
  4. Jeff,
    We are no Nakisa experts, but it provides an interface to enter and maintain contractual attributes of leases and related assets in order to optimize leased assets portfolio management.
    Nakisa is however not required to meet the new IFRS standards for equipment leases. RE-FX will suffice in our opinion since we are currently implementing it at a customer for equipment leases as well. In RE-FX the link can be made with the equipment number in ETM as an object.
    Best Regards,
    Sofie

    Reply
  5. HI, we have not implemented business partners, we are still using the traditional customers and vendors. Is Business Partners an absolute must?

    Reply
  6. Hi Sofie,

    With regard to financial postings for IFRS 16, it would appear that this company has created ROU assets, and runs AFAB on a monthly basis to cater for the “depreciation” or lease liability. My question is: When I run sub ledger to ledger postings ABST2, I see that accounts for ROU do not appear in 0L, but they do appear in TX ledger. For me, there should be postings in both areas, but currently there is none. Where in the real estate module will I find financial reports to support IFRS 16. At this stage, it looks like the balance sheet for fixed assets is now shared with ROU assets. If the balance sheet for fixed assets is 15mln, ROU assets is making it look like 17mln. Surely this is incorrect as ROU is leased liability and not really a real asset.

    Reply
  7. Hello Sofie,
    Thanks for the good information .

    If someone is not using RE_FX module or someone is using RE_FX module for real estate
    do they need separate License to use new Lease Accounting within RE-FX module in both the scenarios.

    Thanks
    Ankit

    Reply
    • Thanks for you comment. For a simple check to see whether you already have the required minimum release in your system landscape, proceed as follows: Call transaction SE11 and check whether the table VICERULE exists.
      If the table exists, you are on the required minimum release (or higher). If the table does not exist, a higher SP is required.

      Reply
  8. Hey dear Sofie, do you know how the repayments are calculated in the REFX Valuation Cash Flow?
    I hardly find anything on that topic and cashflow type 4 does not return the values as shown in that valuation cash flow overview 🙁

    Thanks in advance.
    Katrin

    Reply

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