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Straight Line Revenue Recognition-IFRS 16 Using Valuation

Approach

atif_farooq
Active Contributor

‎03-10-2023 7:07 AM

 4 Kudos

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.
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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

2. 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

https://community.sap.com/t5/enterprise-resource-planning-blogs-by-members/straight-line-revenue-recognition-ifrs-16-using-valuation-approac… 2/20
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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.

3. 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.

4. 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

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Management based on SAP RE-FX).

5. 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

https://community.sap.com/t5/enterprise-resource-planning-blogs-by-members/straight-line-revenue-recognition-ifrs-16-using-valuation-approac… 4/20
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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

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Co. Code and Contract Type Assignment

Valuation Rule for the Linearization

Valuation Rule Overview

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

Valuation Rule Assignment to Co. Code

https://community.sap.com/t5/enterprise-resource-planning-blogs-by-members/straight-line-revenue-recognition-ifrs-16-using-valuation-approac… 7/20
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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.

https://community.sap.com/t5/enterprise-resource-planning-blogs-by-members/straight-line-revenue-recognition-ifrs-16-using-valuation-approac… 8/20
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RE-FX Customizing IMG

https://community.sap.com/t5/enterprise-resource-planning-blogs-by-members/straight-line-revenue-recognition-ifrs-16-using-valuation-approac… 9/20
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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.

https://community.sap.com/t5/enterprise-resource-planning-blogs-by-members/straight-line-revenue-recognition-ifrs-16-using-valuation-approa… 10/20
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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

https://community.sap.com/t5/enterprise-resource-planning-blogs-by-members/straight-line-revenue-recognition-ifrs-16-using-valuation-approa… 11/20
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Lease Out Terms

Valuation Cash-flow Frequency

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Partner Cash-Flows

Debit-Side Linearization Valuation Parameter

https://community.sap.com/t5/enterprise-resource-planning-blogs-by-members/straight-line-revenue-recognition-ifrs-16-using-valuation-approa… 13/20
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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

https://community.sap.com/t5/enterprise-resource-planning-blogs-by-members/straight-line-revenue-recognition-ifrs-16-using-valuation-approa… 14/20
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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.
https://community.sap.com/t5/enterprise-resource-planning-blogs-by-members/straight-line-revenue-recognition-ifrs-16-using-valuation-approa… 15/20
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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://community.sap.com/t5/enterprise-resource-planning-blogs-by-members/straight-line-revenue-recognition-ifrs-16-using-valuation-approa… 16/20
30/05/2024, 10:58 Straight Line Revenue Recognition-IFRS 16 Using Va... - SAP Community

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

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

SAP Managed Tags:

SAP S/4HANA Finance, FIN (Finance), FIN Accounts Receivable and Payable,
FIN Real Estate

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