Implementation of IFRS’16 / USGAAP regulations for Leasing Contracts

On January 1, 2019, the new IFRS 16 accounting regulation for leasing contracts came into effect. Simultaneously, countries obligated to report under USGAAP must adhere to ASC 842 accounting criteria.

This mandatory accounting requirement has had a profound impact on the financial statements of companies adhering to International Financial Reporting Standards (IFRS).

The most notable change lies in the accounting treatment of leases from the lessee's perspective. IFRS 16 has eliminated the dual accounting model that differentiated between finance lease contracts (recorded on the balance sheet) and operating leases (with future rights and obligations not reflected on the balance sheet). With the introduction of IFRS 16, a unified model has been established on the balance sheet, resembling the existing finance lease model.

The primary objective of IFRS 16 is to provide accurate representation of leasing transactions, offering financial statement users the ability to evaluate the amount, timing, and certainty of cash flows arising from leases. To achieve this objective, lessees must recognize assets and liabilities stemming from leases. IFRS 16 introduces a singular lessee accounting model, obliging lessees to acknowledge assets and liabilities for all leases lasting more than 12 months, except when the underlying asset is of low value. Lessees are required to recognize an asset representing their right to use the leased asset and a liability representing their obligation to make lease payments.

Main Management Tools Options in SAP:

Option 1: Spreadsheets/Software provided by auditing companies

Initially, this was the preferred approach for most companies, offering a quick and easy solution to comply with the regulations. However, this approach has significant drawbacks, including:

1. Lack of integration with SAP.
2. Inability to handle large volumes of contracts effectively.
3. Challenges in managing contract renewals and annual fee adjustments (due to IPC or inflation).
4. Difficulty in compliance with Long and Short-Term Reclassification regulations.
5. No integration with SAP's Purchasing module.

Option 2: SAP Standard Solution

This solution covers both IFRS 16 and USGAAP regulations through SAP's standard Real Estate (RE-FX) module. It provides flexibility in choosing whether to integrate with the Fixed Assets module, automatically reflecting the right of use of contracts on the balance sheet. However, it comes with certain drawbacks, including:

1. Mandatory activation of a high-level Enhancement Package.
2. Mandatory activation of Business Function EA-FIN.
3. Mandatory activation of SAP RE-FX module and licensing.

Option 3: CUVIV Product Solution

Similar to SAP's standard solution, CUVIV's product covers both IFRS 16 and USGAAP regulations. It is an ABAP Add-on within CUVIV's machinery, offering seamless integration with the SAP system and compatibility with the Fixed Assets module. Notably, it lacks the three restrictions associated with SAP's standard solution, as it can be implemented without activating Business Function EA-FIN, is compatible with any SAP ECC and S/4HANA system version, and does not require RE-FX module activation or licensing.

The project typically lasts around 3 months and is cost-effective.

For a demonstration of either solution and a comprehensive evaluation of their advantages and disadvantages, please feel free to contact us at [email protected].