I’d like to tell you about leasing and supporting the new lease accounting standards of IFRS 16 and ASC 842. There’s been a great deal of hype and discussion about leasing over the last four years, with many different strategies emerging on how to best meet the requirements of these standards.
As we look at this topic, there are three distinct levels of change an organization can adopt around leasing:
Compliance with the topic, optimization of the real estate and leasing portfolio, and finally, transforming your leasing operations.
Comply means to do just that, do what is needed to meet the requirements for IFRS 16 and ASC 842.
In the compliance option, limited changes are made to existing business processes, automation is applied where convenient, and some manual interventions are expected. The issue with adopting the new lease accounting standards with a simple compliance approach, is that tools are typically selected that support the initial lease valuation, but little consideration is given to how to support lease modifications.
It is important to remember that a lease is a living document which changes frequently. Many changes to the terms and conditions of the lease have a monetary impact. For example, every change to the lease terms such as a change in the probable end date, a CPI change, or a midterm brokerage fee, will impact the lease valuation, and this means all valuation calculations must be reperformed, determining the Delta of amounts in recording the update to the required journal entries and asset balances. This results in a huge amount of work with a high probability of error, which could result in financial restatements.
To optimize your leasing processes, the existing processes are reviewed, and there’s a conscientious effort to reduce the number of manual workarounds, and to look for ways to increase automation.
SAP Contract and Lease Management is a great tool to help you optimize your leasing processes. It is a unified platform for lease administrators and asset accountants, and it also supports the standardization of leasing processes for each asset class, meaning you can define a process for a car lease, another process for computer lease, and yet another for real estate leases.
SAP CLM is a subcomponent of SAP Finance; it is integrated with SAP Fixed Asset Accounting and SAP General Ledger. All customer devolved integrations required when using external solutions such as Nakisa SLAN are eliminated. Because the lease administrator and the asset accountant are working from the same abstracted lease data, all calculations and postings are developed from this data, and the solution will always use the current lease information to perform the lease valuations.
How well does the solution work? SAP engaged PwC to test the solution in delivering an assurance report. For their certification approach, they took illustrative examples found in the leasing standards and manually calculated the expected results.
Next, they created the same example with an SAP CLM, executed the lease valuation calculations and compared results. In every condition, the calculated results were as expected. Finally, they ran different modifications through this process and compared results. Again, the results from SAP CLM were exactly as expected; in line with the manually calculated values. These findings allowed PwC to issue an ISAE certification for SAP Contract and Lease Management. This should give every customer comfort that the solution supports the entire leasing lifecycle, and accurately calculates lease valuations and completely supports accounting around lease modifications.
The third option is transformation. When trying to transform your leasing processes there’s greater prioritization to focus on strategic needs of the organization. Under this approach more leasing processes are standardized, and dashboards and analytics are highly leveraged.
Additionally, there is continuous improvement of data and leases are managed as an enterprise asset. This is where SAP has focused many recent innovations for SAP Contract and Lease Management and will continue to focus on. You will see within the S4/HANA 1908 release innovations such as a lease questionnaire, which is a configurable tool that allows the asset accountant to go through a standardized list of questions, respond to them to assist in the accurate classification of leases, and to document each decision related to that classification. This innovation provides a questionnaire for each valuation rule, so you can account for each valuation rule around each accounting standard.
A valuation cockpit is also available, where leases are visually categorized in pie charts and listed by type and valuation rule. Additionally, users can see the number of leases that have incomplete valuation rules and are able to extract them directly from the individual contract for further processing or to answer specific questions related to the lease agreements. CDS views have been created to enable data to be accessed directly by SAP Analytics Cloud or SAP BW4, without having to load and transform this data for analog reporting. Additionally, SAP delivers content portfolio and lease administration in these applications.
SAP pre-delivers leasing content including information such as totals for base and total rent, number of leases by country, and lease expiration by country. The analytics also cover critical date management, such as renewals, terminations, leases by status, and critical valuation metrics such as leases by valuation type and totals by flow type such as depreciation of interest.
I am confident that these innovations will help you take the next step in your leasing journey, and comply with IFRS 16 and the ASC 842, truly transforming your leasing processes to help you make strategic decisions regarding your leasing portfolio.
SAP has many other exciting innovations planned for SAP Contract and Lease Management. I look forward to sharing those with you in the future.
Please check https://dycsi.net/sap-contract-lease-management-clm-re-fx/ for more information. I also invite you to contact me to learn more about this powerful leasing solution. Thank you for your time and I hope to hear from you soon.