Following up on the introductory blog (SAP and Leasing (Part 1): Changes from IFRS 16 / ASC 842) and the next one regarding the change in the deadline for non-profits (SAP and Leasing (Part 2): FASB Changes the Date for Lease Compliance) we are ready to dive into what the options are for SAP customers.
Who is Who?
First, we need to clarify the SAP options based on the different roles in the lease area. From the lessor point of view, SAP has had a long standing leasing solution that lets customers manage outgoing leases for their assets. It was originally called Leasing Asset Management (LAM) and was a solution within CRM. It has, most likely, undergone a series of name changes over the years because it came out sometime around 2001. This was released after the initial Y2K wave of customers that rushed to implement SAP R/3 which made it quite new at the time. I think it’s now just called SAP Leasing but I’m not 100% sure because it’s outside of our specialized focus here at Serio Consulting. We don’t do CRM.
From the lessee point of view, it has always been possible to manage capital leased assets in standard Asset Accounting (FI-AA). Don’t believe me? Here is the section of the IMG from R/3 circa 1993.
However, this left out operating leases. It has never been possible to manage operating leases in R/3 or ECC. That wasn’t too big of a deal because… referencing the earlier blog… it wasn’t required to keep that data on the balance sheet. That made it easier to just manage the data offline (usually Excel) and then post a summarized journal entry each month for the interest expense. For customers that didn’t have a lot of lease activity, this offline solution was adequate, particularly when you consider that the source data (the lease contracts) was unstructured and didn’t lend itself to an enterprise IT system such as SAP.
Now, IFRS 16 and ASC 842 have changed the requirements which means that customers have had to scramble to get their lease data into SAP.
SAP’s Development History
While the lease standards are officially now in effect, it took several years to get to that point. The two regulatory bodies first took up the leasing topic back in 2008 and there were several delays along the way. SAP pays attention to the plans and pending changes from the accounting bodies for obvious reasons. So, as the leasing topic started to gather more momentum in the 2009-2010 timeframe, SAP knew that it had to come up with a new solution. SAP started to develop a new module that would utilize the Lease Accounting Engine (LAE) that was part of FI-LA. The plan at the time was for it to be a new module native to ECC… which, in our opinion, is as it should be for any transactional based solution that SAP needs to develop. However, while they were waiting for the final regulations to be codified, SAP started moving away from ECC.
First, they announced that ECC and the rest of the Business Suite could run on HANA (previously, it was used primarily as an alternative database). That was announced back in 2013 (Suite on HANA Press Release). Then they announced in 2015 their plans to move the ERP solution from ECC to S/4HANA. Both of these moves required a lot of development resources which meant that the new leasing solution was put on the back burner. That is, until IFRS and FASB near-jointly announced the new leasing regulation in early 2016. At that moment, SAP was in a bad position. Their development resources were tied up with moving ECC to S/4HANA, developing New Asset Accounting, Simple Finance, etc. and now suddenly had to have a solution for IFRS 16.
SAP’s decision was to partner with Nakisa Inc. to use Nakisa’s existing leasing solution. Lease Administration by Nakisa was resold by SAP as SAP Lease Administration by Nakisa, or SLAN for short. It was a separate product but had some basic integration to SAP ECC and S/4HANA. SLAN managed the lease contracts and their valuations but then made the necessary fixed asset master data maintenance and asset/GL postings via a BDC (!!!!!). Very basic integration between these two applications.
Here is what SLAN looked like. Notice the IDES data being used!
Most people who follow this topic area assumed that either SAP would 1) develop their own solution or 2) acquire Nakisa. If you follow SAP at all, you know that their M&A activity is minuscle compared to Oracle, their largest competitor. Up until the 2007, SAP’s only significant acquisition was Business Objects (reference: SAP Acquisitions – SAP Investor Relations. Secondly, SAP has always and predominantly developed their solutions ‘in house’. If you combine those two, it was only a matter of time before SAP would terminate the relationship with Nakisa and no longer sell SLAN… and that’s exactly what SAP announced in December 2018.
SAP decided to leverage their existing Real Estate Management solution (RE-FX) which has a very strong and proven solution to manage contracts. Using this as a base solution and factoring in the already proven capability to manage parallel valuations in the GL and in FI-AA, SAP invested in this area and released SAP Contract and Lease Management (CLM). This has been the go-to solution from SAP to manage all IFRS 16 / ASC 842 compliant contracts within ECC and S/4HANA for sometime now.
I’ll dive into what CLM can do and its integration with SAP Finance in the next blog. But the main takeaway is that this solution was fully developed ‘in house’ by SAP and the base of it (RE-FX) has been in use since the late 1990’s. It’s a stable and often used module/platform for them to extend for the purposes of IFRS 16 / ASC 842.