If you work in the capital accounting area long enough then you’ll eventually have to handle a fixed asset revaluation. While revaluations don’t occur very frequently, they are at the same time a common occurring item. They tend to be very large in scale which means they can attract a lot of attention (i.e., senior management). Multiple parties are usually involved and the amount of data also tends to be extremely large; in some cases, we’ve had to revalue the entire asset subledger. Lastly, they tend to be difficult to handle in SAP because of the variety of drivers, value changes, and reporting requirements that come with them.
If this is something that you have to deal with, particularly within SAP Finance, then keep reading!
What is a Revaluation?
First, let’s define what we’re covering.
There are several types of revaluations and they differ based on both the business event that is driving them and the accounting treatment that is applicable. Some can be executed on a (semi-) recurring basis because they are so routine whereas others are a ‘one off’ endeavor. Most have to be executed on an asset-by-asset basis but some can be done in an aggregate fashion. There are also differences between how IFRS and US GAAP define them.
Confused yet? Yes, there is quite a lot of variation on how revaluations get done, and that variation naturally complicates the implementation with SAP.
The most common business drivers or triggers for a revaluation are:
- Merger or Acquisition (M&A)
- Inflation / Currency changes
There are some differences between how each of the above affects the revaluation effort but I’m going to mostly focus on M&A based revaluations. These are the most common here in the US and therefore the most pragmatic to document. There are cases where US-owned subsidiaries that operate in inflationary prone countries also have to be revalued. This is supported in SAP via an index-based approach so I’ll mention it when necessary.
Most of the time an asset revaluation is an adjustment to the asset’s value, either upward or downward. This can be to its cost basis or accumulated depreciation reserve (A/D). Oftentimes, it’s both that have to be changed to get to the correct value.
There are many ways that the asset’s fair market value is determined. The most prevalent are:
- Market Based
- Current Market Price
- Purchase Price
Most of the time that we are dealing with these in SAP, the asset’s value is coming either from the NBV at the time of the merger or it is coming from a 3rd party appraisal. External auditors usually handle the appraisal value determination.
There are other cases where it is based on the merger’s purchase price. This is referred to as a purchase price allocation and requires that all of the asset values are adjusted in the same pro-rata manner based on how the purchase price compares to the total asset value.
Of course, there are other variations of all of these methods and they can change based on the accounting principles and countries involved.
The first item we look for is to define the type of project. Is this a large scale revaluation or a smaller effort that might be more similar to just being a simple asset impairment?
What is the source of the data? If it’s SAP-centric and based on the NBV then we can usually start right away. If we have to wait on outside auditors to deliver the asset values then the timing becomes a concern. Also, the auditors don’t tend to provide the data at the same asset level as what is in SAP so there could be some Excel manipulation required ahead of time. As mentioned earlier, a purchase price allocation method will take a bit longer in order to agree on how the asset values should be determined.
What about changes to the asset’s depreciation parameters? It is oftentimes required that each of these assets continue to depreciate in the same manner. Here’s an example. If an asset was depreciating at $100 per month prior to the revaluation, then it is expected that it would depreciate $100 per month following it as well (assuming that this is a NBV based revaluation). This brings a host of concerns because most SAP customers don’t have accurate depreciation calculation settings in their systems to begin with. With that as a starting point, configuring new depreciation keys to ensure that the go-forward calculation is correct can be a major task.
What areas are impacted? Some companies only want this to impact the corporate book but others want tax revalued as well. That’s significantly more work.
Need an archive? Before revaluing the asset’s values, most customers want to create an archive of the original purchase price. How should that be done? What tool?
From the technical side, is EA-FIN active? There are some items that SAP delivered via the EA-FIN add-on that directly impact how revaluations are handled. Activating EA-FIN can be it’s own mini-project so that will significantly impact the timeline.
The last thing to focus on is the timing. In nearly all implementation cases the revaluation date occurred in the past. The customer needs time to get the fair market value appraisals from the auditors and they’re generally not worried about fixed assets at the time of a major corporate acquisition (not judging!). They’ll book a top-side entry and fix the subledger later on. But as that time period drags on, it is usually more difficult to fix this using normal means. We’ve handled two revaluations that had to go back 15 and 18 months into prior closed fiscal years in order to reverse depreciation (How to Reverse a Depreciation Run in SAP Fixed Assets), revalue the subledger, make a series of depreciation changes, reverse FI documents, then re-post depreciation until the current period… and re-close the GL and subledger without any other issues.
In the next blog, we’ll cover how this is handled in SAP.