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.
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:
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.
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:
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