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atif_farooq
Active Contributor
Hello SAP Community,

SAP Flexible Real Estate management (RE-FX) has provided so many out of the box functionalities which continue to facilitate Real Estate companies to automate their business processes, provide real-time reporting of Real Estate portfolio and integrate posting from RE-FX to accounting (FI/CO).

Linearization of operating leasing income over the entire duration of the lease out contract is one of the key reporting requirements for the lessor. This reporting is required for the property that has been leased out by him to a lessor. Requirement to recognize income/revenue over the duration of lease has been enforced by IFRS 16. According to the IFRS 16 paragraph 81," A lessor shall recognize lease payments from operating leases as income on either a straight-line basis or another systematic basis."

It is also worth noting IFRS 16.81 does mention that that lessor can also apply any other systematic basis if that basis is more representative of the pattern in which benefit from the user of underlying asset is diminished.

  1. Lease Out and Linearization of Income/Revenue:


I will try to explain concept of linearization of revenue by giving an example for a lease out contract which has following attributes.

Lease-Out Terms

Lease Duration 3 Years OR 36 Months

Lease Start Date: 01.01.2023

Lease End Date: 31.12.2025

Frequency

Yearly Rental Paid in Advance with 10% escalation every year.

1st Year Rental: 120,000 USD

2nd Year Rental: 132,000 USD

3rd Year Rental: 145,200 USD

  1. Standard Solution of RE-FX Accrual Engine:


The standard solution of SAP RE-FX for Accrual/Deferrals RERAALCN does not generate linearized lease revenue during revenue recognition posting for above contract and will generate inception posting and periodic recognition for the yearly rental e.g., for 1st lease year standard RE-FX Accrual engine will post following entries the month ending 01/2023. We will first look into actual bill posted via RE-FX billing engine


Invoice/Billing to Customer (RERAPP):

Customer A/C Dr 120,000

Lease Revenue Clearing A/C Cr 120,000

Below entries will be posted via RE-FX Accrual Engine as per standard solution

Inception (RERAALCN):

Lease Revenue Clearing A/C Dr 120,000

Unearned Revenue A/C Cr 120,000

Periodic Recognition (RERAALCN):

Unearned Revenue A/C Dr 10,000 (120,00/12)

Lease Revenue A/C Cr 10,000

The above revenue recognition pattern will continue to follow in 1st year of lease and in second lease year monthly revenue recognition will happen as 132,000/12 = 11,000 USD per month and so on. This pattern of revenue recognition is not recommended by International Accounting standard to be used for Lease revenue recognition.

  1. IFRS 16 Recommended Approach:


IFRS 16 paragraph 81 states that a lessor shall recognize lease payments from operating leases as an income on either a straight-line basis or another systematic basis i-e for example stated above, we expect (120,000+132,000+145,200) = 397,200/36 is 11,033 USD per month should be the revenue recognized for every month.

  1. Existing Solution (BADI Implementation) in RE-FX Accrual/Deferral Engine:


To meet above requirement for the linearization of leasing revenue, we do have OSS Note 907742 implementations provided by SAP which requires BADI implementations to enhance SAP RE-FX accrual/deferral solution and I have experienced many issues previously with this solution.

SAP as per their OSS note 920772 recommends using new functionalities delivered with note 2255555 - Valuation of leasing contracts (SAP Contract and Lease Management based on SAP RE-FX).

 

  1. SAP Recommended Approach for the Linearization of Lease Out Revenue:


To meet the business requirement for linearization of leasing revenue, SAP has provided a valuation rule FASB13 as shown below as part of the valuation contract configuration for which subfunction of RE-FX CE01- Contract Valuation must be set to active.

In this blog we are going to explore functionality of leasing revenue linearization as per OSS 2255555.

5.1. Configuration Walk-through:

Upcoming screenshots will provide a brief into various facets of configuration required in Valuation part of RE-FX customizing and standard RE-FX customizing.


Activate Subfunction CE01


 

As a prerequisite to the lease valuation solution, the contract type for the lease out must be assigned with integration type 2 Direct Balance-Sheet posting as shown below.


Below can also be accessed via t code RECECUST as shown below.



Valuation Contracts-IMG



Co. Code and Contract Type Assignment


 


Valuation Rule for the Linearization



Valuation Rule Overview


 The associated conditions in Cond Val group are linearized over the contract term (e.g. FASB 13).


Valuation Rule Assignment to Co. Code



Valuation Rule Assignment to the Contract Type


 


Basic Rental Condition Assignment for Linearization



Valuation Object-Dependent Control Parameters


We will now move to basic configuration of Rental Condition, its flow type and assignment of reference flow type together with account determination. This configuration can be accessed via t code RECACUST or using flowing IMG path.


RE-FX Customizing IMG


 


Basic Rent Condition and its Flow Type


The details of Linearization flow types and configuration which have been used in this process are described in the OSS Note 3292340 - Valuation: How to configure flow types for linearization.

I have used Account determination value 1200 to assign Account symbols to the Linearization flow types, use of account determination value for the assignment of account symbols is mandatory to differentiate the account determination for valuation postings by contract object type. This assignment is shown as below.


Assign Account Symbol to Flow Type


In IMG Step Flexible Real Estate Management (RE-FX)>>> Accounting>>>Integration FI-GL, FI-AR, FI-AP>>>Replace Account Symbols GL Accounts are assigned to the Y001 and LEASEREVENUE Account symbols against the Chart of Accounts assigned to the Co.Code of the lease.

6. RE-FX Process Flow for Lease Out Linearized Revenue Recognition Posting

With above step, configuration part is concluded and now let us move to the process flow of Lease Out Contract by creating a contract with attributes as mentioned in Point 1.


Lease Out Contract-RECN



Lease Out Terms



Valuation Cash-flow Frequency



Partner Cash-Flows



Debit-Side Linearization Valuation Parameter



Linearized Cash-Flows for the Revenue Recognition


7. Accounting Entries:

Following entry will be posted when lease receivables are billed to the customer.


Billing to Customer-RERAPP



Linearization for Valuation Cash Flows Posting-RECEEP



Revenue Recognition Posting


Report REISCOCSTACT - Controlling -> Costs/Revenues -> Actual: Period Overview shows below results when we ran it for RO 1300/100/21000011.


REISCOCSTACT Report Overview


 

Conclusion:

Adaptation of Linearized technique using Valuation approach as recommended by SAP provides more qualified and compliant reporting of lease income recognition. I recommend using this approach to simplify revenue recognition process for the Lease Out.

If there are any shortcomings in the article, please feel free to highlight as "To Err is human" 🙂

Important SAP Notes:

https://launchpad.support.sap.com/#/notes/907742 (old solution for Linearization)

https://launchpad.support.sap.com/#/notes/2255555

https://launchpad.support.sap.com/#/notes/2441863

https://launchpad.support.sap.com/#/notes/3292340