In February 2017, the International Accounting Standards Board published a new International Financial Reporting Standard, “IFRS 16: Leasing”. The standard specifies the methods of presenting financial data, cash flows, fixed assets and their valuation. It also specifies which information has to be included in the financial statement. The amended document indicates the changes that will have to be introduced in accounting from 1 January 2019 regarding the inclusion of lease agreements. Therefore, now is the time to think about the methods of optimising the accounting processes.

Although it may seem like just another accounting difficulty, “IFRS 16: Leasing” is the effect of collaboration of the International Accounting Standards Board and the Financial Accounting Standards Board. The purpose of these organisations was to optimise and eliminate the differences in the areas of operating and finance leases of different countries. The new standard will affect the statements of lessees regarding the inclusion of lease agreements in the books. Every lease, including operating lease, will be regarded as a finance lease agreement (excluding the exceptions described in the standard). This means that the balance sheet of organisations is going to carry new assets. In other words, the lease agreement will no longer be a cost – it will become a liability carried on the asset side of the organisation.

Problem with real estate

The problem with the change in accounting rules will also affect businesses and organisations that lease real estate, both owned and rented. This means that companies that lease spaces will have to use a different method of carrying operating lease agreements. This is where SAP comes to aid with the RE-FX solution. Although the module has already been well established on the market for 10 years, this major change did not go unnoticed by the developer, and, in September 2016, a new note was issued to cover “IFRS 16 Leasing” using RE-FX. The added function of the solution enables the object to be combined with the asset, which meets the accounting requirements. With automatic accounting, it will be possible to keep accounts according to IFRS and US GAAP standards and national regulations using a single operation.
– It should be emphasised that SAP used the existing system for real estate recording and valuation and enhanced it by adding the specific features of lease agreements arising from IFRS 16. Thus, SAP Clients can approach this solution with confidence – comments Mr Maciej Kwasiborski, financial expert at SAP Polska.

With this improvement, the lease payment is posted once, the payment is divided into the principal amount and interest, and the calculated depreciation can be viewed from the agreement level. It should be noted that all companies obliged to publish their results in accordance with International Financial Reporting Standards have to comply with this modification of accounting activities. The method of transition to the new standard is also important in this context. If the transition to the new standard takes place during the agreement term, the RE-FX standard will enable the application of various methods, including the fully retrospective method, where the cash flows are compared to the preceding year. RE-FX simulates them as if the new standard had been applied from the beginning of the lease agreement term. Another approach is the so-called partially retrospective approach, where an equity adjustment is included on the date of first application of the standard, or the value of the right to use the asset is determined as a sum of future payments discounted at the marginal lease rate – says Mr Krzysztof Kitajgrodzki, Senior Consultant in the team for finance and analytical systems at Hicron.

Is RE-FX a solution with future potential?

One could ask: why buy the entire RE-FX module if you only need the additional functions relating to lease agreement posting? However, SAP Flexible Real Estate Management does not only handle lease agreements. It also has a large number of convenient functions that can come in handy during the next stage of development of your organisation:

  •  The option to present the full portfolio of real estate, already owned or to be acquired, complete with the information relevant from the business perspective assigned to the individual real estate.
  • The option to represent lease agreements, agreements related to the purchase of utilities, real estate tax, perpetual leasehold, real estate management, deposit management and many others.
  • Searching for real estate that meets specific criteria and creating related offers.
  • The corporate use of real estate by reserving premises, planning relocations and assigning workplaces to employees.
  • The function of mass adjustment of fees by the value of statistical indicators (GUS, HICP, MUICP, etc.).
  • The option to correlate the fees with the amount of recorded turnover.
  • Supporting the determination of additional costs.
  • Monitoring of payments and agreements.
  • Integration with CAD systems.
  • One-time correspondence forms (notices) and cyclical correspondence form (invoices, revised invoices).

Another noteworthy feature is the fact that RE-FX is very well integrated with the Financial Module and Controlling Module. Every action in one of these systems will leave a trace in the form of documentation in the other systems. For instance – if payments related to the agreement are posted, the system will automatically generate a financial document, and this action will also be reflected in the controlling objects. There is no need to duplicate the action in the SAP FI module or CO module. The SAP SD module is not necessary to issue invoices. Full integration of RE-FX with other solutions makes it unnecessary to create odd software patches – comments Mr Kitajgrodzki.

We are currently noticing increased interest from companies in solutions used for lease recording and valuation in accordance with IFRS 16. Contrary to expectations, the new standard that necessitates the changes is only a part of the issue. Companies are using this occasion to improve the administration, recording and valuation of lease agreements and – in a broader sense – to implement integrated recording and management of real estate. We find this to be a very prudent approach – adds Mr Kwasiborski.

What starts bad, ends well?

Tenants will be the ones most affected by the changes, but any organisation may have to deal with agreements that require the new accounting rules. Implementation of the SAP RE-FX module at the organisation is worth considering in order to improve the accounting of long-term agreements and valuable leases in advance, particularly as every implementation process takes time, and this change should be introduced with due care. In time, this will result in better financial management, giving companies a chance to increase the turnover on their business operations.