How to Track Project Capitalized Interest in SAP (Part 1)

There are a couple of things I’ve come to expect from SAP customers, the first being that most tend to be quite large.  This is true in terms of market capitalization but also in other factors such as headcount, logistical footprint, and often in financial complexity.  They also tend to have large capital spending budgets at least when compared to their peers within their respective industries.

SAP has a great solution to help these customers manage their capital spend.  Investment Management (IM) or Portfolio & Project Management (PPM) are great solutions to handle the capital budgeting/planning process as well as on-going appropriation request, analysis and approval.  On the cost capture side, the Project Systems (PS) module is probably the most integrated and flexible module I can think of within the ERP solution (I know that’s probably a lightning rod of a declaration but it’s one I can easily defend… in another blog one day).  On the capitalization side, the fixed asset accounting (FI-AA) subledger can handle any valuation or depreciation requirement I can think of.  Combined, they make an end-to-end integrated solution for capital accounting.

Given that, there’s no reason for a typical SAP customer not to manage their entire capital accounting flow within SAP. Most of the time that’s exactly what we see in the market though there are obviously some exceptions. When we work with customers we definitely see holes in their capital processes and how they match up with SAP. One of the biggest holes that we come across… and it’s probably 90% of the time… is that SAP customers are calculating their capitalized interest charges offline. They’re usually surprised that SAP has a robust solution for calculating their cost of capital and are eager to bring an offline process into the ERP solution.

What is Capitalized Interest?

Before I get into the SAP side, let me quickly review the regulation.  You can find more on asc.fasb.org but here is a quick overview.

FASB first published the regulation as SFAS/FAS 34 in October, 1979.  Since then it has been re-branded as ASC 835-20.  This is an excerpt from the overview of the regulation:

If an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset. 

What that means is that a company can capitalize various portions of costs that it incurs to create an asset.  That asset could be used for the entity’s own use or sold/leased as a product or piece of property.  Other costs for assets that are inventory items, assets that are consider ‘in use’ or ‘ready to use’, or assets not used in the earning activities are not applicable.

The intent is to track the cost of capital (or ‘cost of money’ as it is sometimes referred to) to encourage companies to further invest and utilize their funds rather than to just sit on them and earn interest revenue.  Companies are allowed to apply an interest rate to the balance of the costs that are accumulating and capitalize them as a way to offset the loss of revenue.  It encourages companies to put their money to good use rather than keep it dormant in a bank account.

What’s the Wrong Way to Handle Cap-I in SAP?

In a word… externally.  Nearly everyone we engage with calculates their Cap-I amounts offline and then load it as a journal entry.  It’s a simple calculation and nearly everyone has some sort of FI document upload tool anyways.  However, like almost all other external solutions like this, there are issues with this approach such as the following:

1. Accuracy — Anything that can be calculated and reported offline in Excel is something that can be messed up.  Copy/paste errors, bad calculations, wrong formulas, incorrect cell references, etc.  It happens to all of us at some point.
2. Security — Who has access to the file?  Who is approving it?  Who is uploading the entry and reviewing it?  It seems that every customer we go to has different interpretations and expectations regarding SOX compliance and separation of duties (SoD).  Some customers are more formal, strict, and disciplined in their review processes whereas others aren’t.  It depends on the company but it’s possible that this offline approach would be heavily scrutinized once they’re aware that an SAP solution exists.
3. Time — Why go to the trouble of handling all of these steps offline when SAP has a single transaction code to make the calculation and perform the posting for you?  As you’ll see, it’s similar to settlement, results analysis (RA) and other period-end jobs in PS.  It’s not a big deal to execute it at month and gain the advantages that a regulated and controlled system such as SAP offers.
4. Errors in extraction — The biggest issue I find with customers and this manual extract-and-calculate-in-Excel process is that they will occasionally miss a new project as part of the extraction. The other one is that they’ll mess up getting the right balances.  It’s not rocket science but I think we can all agree that getting data OUT of SAP is sometimes harder than it should be.  Eventually we all can make a mistake on this step.
5. Lack of Integration — Even if you successfully upload the interest postings, they’re just a basic FI document.  There isn’t a drilldown to the project or the interest details.

What’s Next?

In the next blog, I’ll review the SAP solution in PS for calculating and posting interest.

How to Track Project Capitalized Interest in SAP (Part 2)