Listen as SAP’s Pete Graham discusses how SAP Contract and Lease Management (CLM) helps optimize lease accounting for IFRS 15 and ASC 842.

Also, below is a transcript of the podcast episode:

Jim Hunt: Hello, this is Jim hunt for Bramasol’s Insights to Action podcast series. Today I’m really pleased to have Pete Graham back with us. Pete is SAP’s Director of Finance Solutions and Mobility, and we’re going to talk about SAP Contract and Lease Management, known as CLM, and how it can optimize your lease accounting activities. Pete, it’s great to have you. Welcome.

Pete Graham: Thanks, Jim. Great to be back.

Jim Hunt: Let’s just start off, if you can provide kind of a quick overview of lease accounting changes over the past few years to give us some context.

Pete Graham: Sure. So if we go back a little bit, in 2016 the Financial Accounting Standards Board, also known as FASB and the International Accounting Standards Board, also known as the IASB, announced new accounting standards, which are ASC 842 and IFRS 16. They essentially redefined how organizations must account for leases and they became effective on January 1st, 2019.

In my opinion, the release of these standards was far more than just an accounting change. It was an event that had profound implications on corporations including the digitalization of all leased assets. Their lease-buy decisions certainly could be impacted as well as internal processes for coordination and financial reporting. So it was had a big impact. It was a little broader than most people thought, and SAP has experienced a wide range of requirements related to the lease accounting topic, especially across the different geographical regions around the world. So in our opinion, it’s clear that a sustainable lease accounting solution needs to be flexible and customizable to support a wide variety of customer regional requirements. And this was an important goal in the evolution of CLM.

Jim Hunt: That’s great. Maybe you can talk about how CLM came to be, how it evolved.

Pete Graham: Sure. So SAP Contract and Lease Management, or CLM as we call it, is a leading end-to-end solution for managing contracts for both Lessors and Lessees. CLM was first introduced as part of SAP Real Estate Management back in 2005. Then when IFRS 16 and ASC 842 came up in 2016, we had a lot of customers asking us to sell it separately. So in 2018 it was introduced in ECC or ERP as its own SKU or as part of Real Estate Management to give customers options for purchase. So CLM on ECC by itself or within Real Estate Management is the same solution. In SAP S/4HANA, CLM is available as part of the RE/FX suite rather than a separate SKU. It’s important to note that for customers who do not need the full real estate management capabilities, lease accounting, the CLM portion of RE/FX in S/4HANA can still be implemented alone.

Jim Hunt: So in a way CLM predated the changes with IFRS16 and ASC 842, in the real estate sector, and then it was really easily adaptable because the solid base of technology was there already.

Pete Graham: Yes, that’s correct.

Jim Hunt: So how does CLM handle the data needed for complying with ASC 842 or IFRS 16?

Pete Graham: Sure, that’s a good question. So when configured properly, SAP CLM provides a single point of entry for the collection of leases, for the validation of lease contract data, for the ability to perform valuation calculations, and for the ability to generate the related financial postings that are aligned with the new accounting standards, IFRS 16 and ASC 842. CLM also has some mass upload capabilities using APIs at time of conversion and has a native integration into asset accounting and finance, actually the SAP core financials. So it can help you manage your foreign currency contracts as well, related to lease accounting.

Jim Hunt: Right. So what type of reporting can you get out of CLM?

Pete Graham: Sure. So in SAP Contract and Lease Management the reporting content is divided into several categories which we’ll mention as follows. So, there’s a contract management side, there’s a contract accounting conditions area, and there’s valuation evaluations, as well as other evaluations.

Contract management:

  • Contract overviews

  • Overviews for contract objects

  • Term reports

  • Renewal overviews and notice overviews

  • Contract reminders

  • Change documents for contracts

Contract accounting/conditions:

  • Condition overviews

  • Partner-related cash flows

  • Posting logs

  • FI/CO document overviews

  • RE document overviews (for example, the informational valuation rule)

Valuation evaluations:

  • Overviews for valuation rules

  • Holdings overviews (for example, including filter function)

  • Period-specific holdings overviews

  • Overview of leasing assets

  • Liabilities grading (undiscounted)

  • Liability sorting

  • Mass maintenance transactions for the valuation rule

Other evaluations:

  • Overviews for index adjustments (CPI)

  • Overviews for contract business partners

So, if you dig in a little bit more, on contract management, we can go through contract overviews, overview for the contract objects, which are the way that CLM works. A little bit deeper into the product are the term reports, renewal overviews and notice overviews, contract reminders potentially for updating key dates as well as change documents for contracts, if there’s any changes in them.

For contract accounting and conditions, you have condition overviews, partner related cash flows, posting logs, financial document overuse. These might be familiar to some folks as FI/CO if they’re familiar with SAP as well as real estate document overviews.

So, some of this gets a little more detailed, but for example, there may be an informational value rule that you’ve assigned in the system and that would be something that the report would tell you about on the valuation evaluations. Then there are overviews for the valuation rules, so you get clarity on that. Also, there’s holdings overviews. So for example, you might have a filter function set up on one of your rules. There are specific holdings overviews. There’s overview of leasing assets liabilities, grading, these that are undiscounted liability sorting and mass maintenance transactions for the evaluation.

Finally, the other evaluations get into some unique requirements or situations where you might have a CPI index adjustment. So there’s a way to see that in the reporting if you have it set up or configured to track that as well as overviews for certain contracts for business partners.

So that’s kind of a quick summary. There’s certainly more information in the help documentation online help, as well as some additional information that is related. If you go into the SAP note system, if you’re familiar with that, you can pull up SAP Note 2255555 Valuation of Leasing Contracts. And in there there’s actually an FAQ link related to reporting. Finally, CLM also offers flexibility for easily creating customer-specific reporting. For example, you can use customer defined fields and customer defined report structures in a report that essentially would be configured locally at the customer site.

Jim Hunt: So it sounds like CLM is much more than just a compliance tool, it’s an asset management tool.

Pete Graham: Well, I think it helps you manage those least assets and certainly the underlying assets could be then stored in the asset module within SAP core financials.

Jim Hunt: And much better than an offline or standalone lease accounting management tool like spreadsheets and so on.

Pete Graham: Certainly compared to ad hoc tools, we think this is a much better option. You have much better transparency in line of sight with all of the lease data and the lease activities that are related.

Jim Hunt: Right. And that notion of integration brings us to the next question about how CLM integrates with other SAP finance reporting and management capabilities.

Pete Graham: So due to the native and direct integration of SAP Contract and Lease Management with core SAP financials, the data from the core financials can be combined with the data from CLM with the right setup. These include account valuations for short-term leases or perhaps you want asset balance reports from assets. We also have an intelligent enterprise real estate solution or intelligent real estate management as we like to call it.

So there’s more reporting capabilities there that customers may want to look at and explore to see how they can combine. Certainly there are other capabilities for cross application reporting. There are extractors from SAP BW or SAP Analytics Cloud. So again, the reporting options actually are quite broad and we’re not going to cover all of them in this podcast, but just let customers know that there are other options out there that they can investigate on their own.

Jim Hunt: And it sounds like, with so many of these SAP applications that integrate directly with S/4HANA, that CLM is a good step on a customer’s S/4HANA journey?

Pete Graham: Yeah, I mean certainly you would be rolling out the S/5HANA financial core and CLM plugs right into it. And like I said, it has native and direct integration with the core. So yeah, it’s very aligned with a move to S/4HANA and also we’ll get to that in terms of the call to action, especially if you’re going to do a kind of transformational step, right

Jim Hunt: Right, and that’s where we are. This is a great overview. So as far as call to action in words of wisdom, what should listeners be doing now?

Pete Graham: Yeah, so I think a listener’s call to action could so look something like this. First determine if all your leases have been digitalized or not. If not, I would make plans to get them digitalized. And this is certainly an activity where CLM can assist. That’s also a way to make sure you’ve got full enterprise transparency and visibility across your whole lease portfolio.

Second is really to take a step back and assess where you are. So, like we’ve talked about on other webinars and other meetings, the Comply, Optimize, and Transform methodology helps to understand where your organization stands with respect to lease accounting. So for example, if you are just complying with the new IFRS 16 and ASC 842 standards with ad hoc processes like you mentioned, maybe Excel or combination Excel and access database, you may want to use CLM to make that optimization step; to take that compliance-only set of activities and really make it much more efficient, much more integrated with your reporting pieces within your financial landscape. So using CLM for that optimization step would make sense.

It also could be that you’re comfortable with the current processes in place and maybe some of those are you’re already using CLM, but you didn’t have time to optimize those processes further, or you want to really transform them. So if you would like to see major improvements in real-time reporting and in the processes themselves, and maybe the next step would be to transform your processes and reporting with the move to CLM on S/4HANA Rise, right? So that’s where you would make kind of a step change or a big jump in terms of the capabilities that you have at your disposal.

Jim Hunt: That’s a great summary, and Pete, I will include a hot link to the knowledge-base note that you mentioned in the transcript of this podcast so people can go straight to it.

Pete Graham: Ok, that makes sense.

Jim Hunt: Anything else you want to mention? This has been great but any final words?

Pete Graham: I just want to thank people for taking a listen and just reach out to us if they have further questions.

Jim Hunt: That’s great. Thank you again, Pete. I look forward to talking to you next time.

Pete Graham: Sounds good, Jim. Thanks.

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