Are You Ready for IFRS 16?

Posted by Phillip Schell Jun 28, 2016 12:47:00 PM

 

Are You Ready for IFRS 16?

 

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released new accounting standards that define how organizations must account for leases.  These accounting standards, addressed in the International Financial Records Standard 16 (IFRS 16), stipulate how most leases must be reported on a company’s balance sheet.  For many lessees -- this change is huge.

While the new leasing standard does not go into effect until January 2019, companies can begin reporting in January 2017 and start communicating expected changes with stakeholders – now. The new standard will affect virtually all commonly-used financial ratios and performance metrics such as gearing, current ratio, asset turnover, interest cover, EBITDA, EBIT, operating profit, net income, EPS, ROCE, ROE, and operating cash flows. These changes may affect loan covenants credit ratings and borrowing costs, and could result in other behavioral changes. And, these changes may compel many organizations to reassess certain ‘lease versus buy’ decisions.

IFRS 16 changes will affect lessees in the following key areas:

  • Balance Sheet: Initially recognizes lease assets and liabilities on the balance sheet at the present value of future lease payments.
  • Income Statement: Recognizes amortization of lease assets and interest on the lease liabilities over the lease term. The overall effect on profit will depend on the portfolio of leases an entity holds. However, in the earlier years of a lease, it is expected that the profit will be lower as a result of higher interest accruing on the lease liability (akin to an amortizing mortgage).
  • Cash Flow Statement: Separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within either operating or financing activities). 

As you can see, the changes are dramatic. This is not just a software change or upgrade. It is a major change in business processes, how applications integrate to accommodate the rule change, and last but certainly not least -- companies will be challenged to effectively communicate IFRS 16 standards to stakeholders who will see major changes in financial results.

To successfully implement IFRS 16 requires a structured initiative that will manage:

Business Process Change

Business processes in many areas, including finance, procurement, tax, treasury, legal, operations, corporate real estate and HR will have to be changed and aligned to support a successful adoption of the accounting changes.

Software Application Integration

For those companies with real estate in one application, assets in another and separate G/L, it will be difficult. The SAP integrated platform will make this a much easier. SAP customers who are already on SAP Real Estate and have their fixed assets in SAP will have an enhancement to download in a few months that will put them into compliance.  

 

SAP Real Estate Management application enables coordination between different departments.

The solution also provides lease accountants the ability to evaluate the financial impact of each lease and ultimately generates all valuation postings required by the new leasing standards.  It even manages the postings for multiple lease accounting standards simultaneously, regardless if the general ledger account or parallel ledger methodology is utilized. This solution is part of SAP Finance and is completely integrated, helping avoid the kind of costly disruptions that can derail critical business processes, operations and costly noncompliance events.

Stakeholder Communications

Corporation stakeholders will need a lot assistance in understanding the changes in nearly all financial ratios and performance metrics such as: gearing, current ratio, asset turnover, interest cover, EBITDA, EBIT, operating profit, net income, EPS, ROCE, ROE and operating cash flows.

Even though the new leasing standards are not effective until December 2018 for US GAAP and January 2019 for IFRS, companies can choose to be early adopters and begin reporting January 2017.  Whether you choose to be an early adopter or comply by the deadlines, there are certain things you can do today to prepare.

Current SAP Real Estate Management users should implement the new leasing enhancements as soon as they are released to begin evaluating the impact on your financial statements.  Even if you do not intend to be an early adopter, the loading of the leases and analyzing the results will pay big dividends in the future.

Companies that implement the SAP IFRS 16 enhancements quickly can run it in simulation mode only and use the results to compare their financial performance before and after implementation. We believe that when key executives are knowledgeable about how IFRS 16 changes will affect performance reporting, they can effectively communicate with their stakeholders.

Recently, B4 Consulting announced its support for IFRS 16 real property leasing with SAP Real Estate Management, which includes implementation services for real estate, procurement, and financial management. Through an IFRS 16 Assessment,  we examine all your business processes and areas affected by IFRS 16. Then, we develop a road map and budget for successful implementation of IFRS 16 standards – including stakeholder communications.

Get ahead of the curve and let’s talk about how you can successfully prepare for IFRS 16. Email me at pschell@b4-consulting.com.

 

Phillip Schell is vice president of Industry Solutions at B4 Consulting, Inc.

 

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Topics: SAP, B4 Consulting, SAP Real Estate, Reporting, IFRS 16, Leasing, Real Property, Leases, Accounting

Reality Check on Real Estate ERP

Posted by Phillip Schell Dec 18, 2013 1:11:00 PM

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In a Realcomm Advisory, a couple of years ago, the question was asked “Can real estate ERP vendors keep pace with industry demands?” Reviewing the pros and cons of Real Estate ERP and point systems, which had been broadened and integrated to perform more back office functions, the Advisory challenged the industry to “take a fresh look at the available options.” In light of the technology advances over the past two years, I believe it’s high time to re-examine Real Estate ERP functionality through a technology innovation lens.

Annually, SAP® invests more than $2 billion dollars in R&D aimed at advancing its customers’ technology platform. The following will highlight innovations resulting from these investments, and underscore how some implementation partners are creatively using these tools and concepts in real estate projects to create world-class solutions.

Game-Changing Technologies for Real Estate Management

The SAP Flexible Real Estate Module is part of the core SAP ERP solution. It is a powerful processing engine for all aspects of real estate business processes, which includes solutions for: Lease Administration; Property Management; Sustainability; Deal Flow Solution; Lease Level Budgeting; and Project Management/Fit Up.

These solutions are the industry’s most robust and advanced as they are continually enriched by ongoing SAP investments in technologies spanning: the cloud; mobility; business analytics; Big Data; and user experience and business function enhancements --including the Common Area Maintenance (CAM) Expense Recovery application. Solutions are further enriched through SAP strategic acquisitions and internal development projects – the fruits of which are integrated into the overall SAP architecture.

SAP has also brought to market new in-memory processing capabilities with HANA – a high-performance analytic appliance. This game-changing tool for Big Data delivers real-time analytics and data aggregation for new levels of business insight. Deployed on-premise or via the cloud, HANA is a revolutionary platform that features at its core a real-time database. This real-time database is the result of a combination of row and column store, which is fundamentally different from any other database engine on the market today. With real-time data, regardless of granularity at your fingertips via the device of your choice, you can make fact-based decisions to better manage your property portfolio for increased profitability, compliance and sustainability. And, SAP HANA is not just for large enterprises. It can be used as a highly affordable cloud-based, pay-as-you-go subscription at a very low rate.

While HANA is revolutionizing the world of real-time data, SAP has also introduced two new solutions to greatly enhance the user experience – SAP Fiori and SAP Screen Personas. These complementary solutions make SAP highly intuitive – debunking that old industry thinking that SAP is too complex. Fiori and Personas create consumer-grade user experiences that help advance adoption of business processes and increase productivity.  Out-of-the-box and ready-to-run, SAP Fiori is a set of applications that deliver a simple, intuitive user experience across your most frequently-used business transactions. The design offers a seamless experience from laptop to mobile devices, which allows you to quickly and easily execute tasks. SAP Screen Personas provides a simple, drag-and-drop approach to modify most SAP GUI screens on your desktop (Windows & Mac). It enables IT and business users to quickly simplify business application screens without any programming knowledge. With SAP Screen Personas, you not only improve the performance of SAP – you can personalize any transaction in minutes.

When it comes to mobility, SAP has a rock-solid portfolio of solutions that enable you to securely conduct your business anytime, anywhere, and on any device. It’s well-recognized that HTML5 is the future of programming -- especially for the mobile web and SAP is leveraging HTML5 and open standards to quickly build mobile applications.

SAP ECOSYSTEM

While this snapshot of SAP innovation distinguishes SAP from point-solution vendors who lack the bandwidth and resources to keep pace with technology that fuels growth, I’d be remiss in not citing the SAP partnership ecosystem that contributes as well to innovation. For example, thousands of SAP-certified third-party solutions can be used to enhance your ERP platform. Office applications from Microsoft and Adobe are integrated into the ERP processing engine, enabling you to work in Excel or an Adobe form and then create transactions in the ERP engine. And, SAP further extends ERP functionality via acquisitions, some of which include:

  • Ariba  - for cloud-based buying, selling, and managing cash in a network economy
  • Business Objects - performance management, planning, reporting, query and analysis and enterprise information management.
  • Coghead -Web-based service for building and hosting custom online database applications to facilitate business data management and collaboration.
  • Hybris – an integration framework that enables a commerce platform for direct selling to all customers.
  • SuccessFactors – cloud-based human capital management solution suite.
  • Sybase – enterprise solution to manage, analyze, and mobilize information
  • TechniData – compliance management solutions for products, the environment, chemicals, and health and safety

What do these extensive offerings of certified solutions, acquisitions, and innovations mean for real estate? All of your business needs are handled on a single, integrated platform today and tomorrow. SAP’s annual $2B spend on R&D is ongoing to ensure you can run the best real estate portfolio.  Capitalizing on these technologies, implementation partners such as B4 Consulting can design truly end-to-end solutions for real estate companies of all types -- commercial, corporate and REITs.  ERP is a powerful processing engine, but we now are able to use the rich ecosystem of solutions cited herein to enhance functionality, improve the user experience, and empower you to innovate with technology.

Mobility is a prime example as to how the power of ERP is brought to field functions such as property management. Access to real-time data enhances mobile dashboards and KPIs for managers and executives.  The powerful integration of ERP processing coupled with native property management functionality enables CAM to work even more seamlessly. The same data in ERP is integrated with CRM to deliver Deal Flow functionality the mobility pushes to the field.  Historically, many implementation partners would use the ERP system itself to try to deliver this functionality. The result was often non-intuitive, clunky and not easy to learn. All that has changed with the new SAP.

As noted a couple of years ago in a Realcomm Advisory - ERP vendors are heavily investing in the real estate space.  The new SAP has been aggressively providing the real estate industry with rich functionality and new business capabilities and insights through its pioneering technology strategy, R&D, acquisitions, and partner ecosystem.

Revisiting the Mainstream ERP vs. Real Estate ERP posited a couple of years ago, we see that SAP solutions are quickly closing-in on delivering a fully robust and integrated ERP platform for real estate.

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Mobility, Big Data and global scalability are of growing importance to Real Estate CIOs  It’s time for industry decision-makers to revisit their technology landscapes and revitalize their vision for success by adopting a strategy for innovation that fuels growth and competitive advantage.

To learn more on how you can optimize your real estate portfolio with innovative solutions from the new SAP -- email me at: pschell@b4-consulting.com.

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Topics: B4 Consulting, Mobility, Dashboards, SAP Real Estate, SAP ERP, Property Management, Real Estate CIOs