Details on how AROs work in SAP Asset Retirement Obligation Management (AROM) (Part 2)

Details on how AROs work in SAP Asset Retirement Obligation Management (AROM) (Part 2)

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Now that I’ve introduced you to AROM, I’d like to show you how they work.

To start with, I’ll create a simple ARO and walk you through some of the calculations and reporting that is available.

Below is a completed ARO. You’ll notice that there are three main sections; General Data, Cost Estimation Plans, and the Calculation Details at the bottom. Since the screen is so large, I’ll cover each section in detail. This also is a good way to work with an ARO because each section provides more details about the section above it. You will naturally follow the ARO’s information from top to bottom.

 

 

General Data

First, the General Data section. This area acts as a header to the detailed Cost Estimation Plans (CEP) that are entered against an ARO. There is a General tab, shown below, that stores some date information as well as the asset class and the interest and inflation rate keys. If the ARO is assigned to an underlying object, it will be displayed here. I’ll cover underlying objects in a future blog.

 

 

After the General tab are a series of tabs for each accounting principle. In the US, we are only focused on US GAAP (shown as USG in the image below) and IFRS. Other international customers may require different tax or local GAAP valuations such as HGB in Germany. Either way, an ARO can manage up to 8 distinct valuations in parallel.

The accounting principle tabs store the inflation and interest rate keys that are used in the discounting calculation. For US GAAP, there is also a specific calculation method that is used to influence a layering of the CEP values based on subsequent changes.

 

 

The last tab displays the ARO’s account assignments. An ARO can be assigned to most any typical account assignment object such as business area, cost center, internal order, WBS element, profit center, segment, and functional area. It can also be assigned to others such as Plant, Location, or Room to support additional information in reporting.

 

 

Cost Estimation Plans

Once the information in the General Data section has been completed, it is time to move on the transactions area. AROM uses cost estimation plans to assess the value of the ARO. Each CEP has some distinguishing characteristics:

  • Settlement Date – This is the due date of the payment used to retire the asset. It is possible to have multiple settlement items in a single CEP where each item has a different settlement date.
  • Price Key Date – This is essentially a valuation date. The price key date is used to determine the rate which is chosen when calculating the settlement item.
  • Cost Estimate – This is the amount that is estimated to retire the asset.

In the image below, the first CEP is for $10MM and is an estimate to tear down the asset.

 

 

It is possible to have multiple CEPs for a single ARO. To support this, the CEPs are displayed in a tabular grid and are to be interpreted sequentially. For a simplistic ARO, the asset will be retired in one process so only a single CEP is required. However, more complex scenario exist where there may be multiple stages of the retirement and restoration process. Also, AROM tracks changes to the cost estimates as individual CEPs. If a change in the interest or inflation rate key is required, a new CEP will have to entered. The image below shows the details for a second CEP related to the same ARO. THe second step in the retirement process would be to restore the land to its original use so a second CEP is created for $1MM.

 

 

As I mentioned earlier, the CEPs are viewed in a tabular grid and can be viewed from within the ARO.

 

 

Calculation Details & Reporting

Now that the CEPs have been entered the final section will display details about the calculation. First, the General tab will show some header type information about the CEP that is selected above.

 

 

Focusing on the US GAAP calculation, the ARO’s current cost estimate value is displayed. On the right side is additional data related to the ARO’s initial provision amount of $3.198MM as well as the expected provision amount at the end of the obligation’s life (Provision EOO of $17.758MM). The total interest cost at the end of the obligation’s life of $14.559MM is also shown.

 

 

From this section it is possible to launch a series of more advanced tools to provide more information on the values displayed in this section. First, AROM also has an excellent calculation trace tool that will explain the specific calculation steps. This shows how the initial cost estimate is inflated out to the ARO’s expected retirement date and then subsequent net present value calculation back to the current date.

 

 

A cash flow report can also be generated. This will show a period-by-period breakdown of the interest expense and the amount of the provision’s increasing balance.

 

 

Finally, for US GAAP it is required to track any subsequent changes in the form of a calculation layer. AROM supports this via a handy calculation layer report. For this simple ARO, there is only the initial layer to account for.

 

 

However, once the ARO has a subsequent retirement or negative adjustment, the different layers are created. I’ll go into more detail on the US GAAP layers in a future blog.

 

 

Next Blog

In the next blog I’ll cover how the Lease Accounting Engine (LAE) and discuss the importance of it to AROM.

Note: This blog was originally published on SCN on September 6th, 2011.