IFRS16 compliant CAPEX SAP solutions

[akoptev]

Hi everyone,

I am an SAP Real Estate management solutions consultant and would like to share with you some thoughts on IFRS16 regulation and its impact on CAPEX SAP solutions.

Does CAPEX SAP solution need to be IFRS16 compliant? What is a new SAP Real Estate Management(RE-FX) module role in CAPEX SAP solutions? How to build IFRS16 compliant SAP solution? These are the questions I am trying to raise in this article. This article was written for those who want to know what happens under the bonnet of SAP CAPEX solutions.

SAP software professionals know that there are four ‘usual suspects’ modules for CAPEX SAP solutions (in order of appearance on a screen in the business process):

• SAP Portfolio and Project Management - SAP PPM. An SAP software module designed to automate project portfolio management including budgeting, planning and execution control


• SAP Investment Management – SAP IM. Designed to help businesses to manage investment programs


• SAP Commercial Project Management – SAP CPM. Used for project planning and execution management. It brings extra functionality as well as an additional layer of user experience on top of SAP PS functionality


• SAP Project Systems – SAP PS. A ‘backbone’ of all SAP CAPEX solutions. This software covers most areas of project management business processes including scheduling, budgeting, planning, actual cost accounting, reporting and many-many more. This module seamlessly integrated with most of SAP Logistics and Accounting modules and able to provide the lowest level project-related reporting granularity

 

Typical CAPEX business scenario and its SAP implementation:

Let us briefly review a typical CAPEX project of a non-construction company (retail, banking, telecom, manufacturing, logistics etc).

For example, we are a coffee shop company who is unable to reopen its shops due to the pandemics plan to open another drive-through store on a motorway service area:

• Phase 1 – Project preparation phase: This includes various motorway service and construction companies’ assessments and negotiations. As an outcome – we have shortlisted a few sites and several construction companies.

High-level budget and future project ideas outlined in IM & PPM modules. Various project proposals finalised and submitted for options appraisals in PPM along with future cash flows/NPV. Project options risk assessments done and recorded in PPM. EnginesWorkflows started.

• Phase 2 – Detailed project planning: Project staffing as well as detailed project plan preparation is in process. A ‘letter of intent’ or even a commercial agreement can be signed with the construction company toward the end of this phase.

As soon as the detailed project planning started, we can distribute budget figures from PPM to PS & CPM followed by the detailed cost planning activity. SAP PS (with CPM on top of it - optionally) can support our project staffing, detailed cost planning and project calendar scheduling activities.

• Phase 3 – Project execution: We happily signed the contract with the construction company who has started store construction for us. Project management involves actual costs allocation, resource management, risk management, change request management etc.

All three modules PS, PPM and CPM have various tools and features to support project execution process. PS project elements can be Released at this moment. Payments(including lease-in) can be done in SAP using the standard procurement process with PS WBSe/Activity cost allocation. This will eventually give us the required level of cost reporting granularity as well as active availability control and other useful features. SAP PS have created AUC assets for us automatically and we do periodical costs settlement.

• Phase 4 – Handover process and sign off: Within this phase, the project committee runs building acceptance process, sign off the project completion etc. (I wish it was that simple and easy as it is written in this sentence).

In SAP, all costs are recorded and allocated to PS WBSe/Activity. PS Project Technically completed and costs are finally settled. Brand new, fresh, and glossy fixed assets are created and capitalised. Depreciation postings started to flow.

 

AT THIS POINT YOU, PROBABLY, WANT TO ASK: ‘BUT WHAT ABOUT IFRS16’?

Exactly! Did we forget something? The answer is - Yes.
Are we IFRS16 compliant? The answer is - No.
This is because traditional MM - driven lease-in services procurement is not IFRS16 compliant. It does not recognize Right-of-Use (ROU) asset and a lease-in liability on a companies' balance sheet.

And this is where SAP Real Estate Management (RE-FX) IFRS16 module comes into play.

 

IFRS16 compliant CAPEX SAP solution

 

The modified, IFRS16 compliant CAPEX solution:

 

• Phase 1 - Within this phase, we perform lease-in agreement negotiation.

In addition to the SAP functionality above, lease negotiation progress, as well as future lease details, can be recorded in SAP RE-FX using lease-in Contract offer. Upon agreement and sign off it will be automatically converted into IFRS16 compliant SAP RE-FX lease-in Contract.

During the negotiation phase, we can also create SAP AUC Right-of-Use (ROU) asset (please ignore, just kidding, there is no such a thing as AUC ROU asset, I'm just checking that you still follow the process).

 

• Phase 2 & 3 - At some point during Phases 2 & 3 we need to sign the land parcel lease and start lease payments.

From SAP point of view, it means that we need to create IFRS16 compliant SAP RE-FX lease-in Contract, activate it and start SAP RE-FX ‘self-billing’ with SAP PS WBSe/Activity cost allocation as soon as the lease signed. This will guarantee that all project-related costs (including lease costs) are correctly attributed to SAP PS project structure. At this very moment, SAP IFRS16 solution will automatically calculate and create SAP lease-in ROU asset along with lease liability. As you can see, SAP IFRS16 ROU asset depreciation postings are started way before the store is built and respective fixed assets are capitalised. After PS project Technical completion SAP RE-FX lease-in costs should be diverted from the PS project structure to responsible Cost centre.

 

This sort of solution design will guarantee that your SAP solution is IFRS16 compliant. Of course, it’s not the only possible IFRS16 compliant solution.

There are two common alternative ways to build IFRS16 compliant SAP solution without having RE-FX in place:

• Option 1: Excel IFRS16 calculations and SAP journal postings. This is a time-consuming and unreliable, but still, workable approach. Obviously, works only with a small number of leases.


• Option 2: Non-SAP ‘niche’ or ‘light’ IFRS16 software packages with bespoke SAP interfaces integration. This is a working approach, but it can be very expensive sometimes (believe me I have been supporting a lot of bespoke SAP interfaces to be able to confidently say that this approach can be very expensive sometimes).

 

Disclaimer: I intentionally described non-customer-driven construction scenario as I would like to write a separate article on Customer relationships management using SAP RE-FX functionality. This article will cover various business process touchpoints between SAP RE-FX and CRM systems as well as CRM processes and system specifics in integrated property management solutions.

 

If you have any questions, comments or thoughts feel free to comment or contact me both here and on LinkedIn.