Gain is the key, it is a business buzz word. For that reason we are defining a long term and a short term strategy, setting up new affiliated companies, consequently modifying products and services.
In general, there are two widespread accepted practices all over the world. One of them is focusing on tailoring costs, while the second one, which is undoubtedly more enthusiastic ,is related to the potential income – new potential income sources. It is not important which one from the proposed we choose at the moment, because with the solution specified below will follow both, which at the end positively affect our profitability measured by EBIT. It sounds like a manager’s dream but it is real with SAP REFX solution.
First, let’s focus on financial benefits
In a classic FinancialAnalysis, real estate positions in a balance sheet were seen as “non-income related”; they also influence a lot of indicators like ROA, ROE Du Pont or Basic Earnings Power Ratio. How to influence return on assets without causing a revolution? Increase your counter value with Net income, decrease the denominator with net book value. Naturally, one of the most popular methods involved a wide range of leasing types and/or outsourcing practice. That was the main stream during the whole 90`s – many companies around the world reduced their tangible assets to get the goal “focusing on their most profitable activity”.
Today, after the financial crisis of 2008/2009, we consider the meaning of real estate in a totally different way, more as a kind of warranty. Consider that from a Bank`s perspective, having such fix assets is just being “trustworthy”. On the other hand, it increases your leverage effect, so can be used as a supporting tool for getting a better deal on (your) loan percentage rates. What if behind these advantages there is a possibility of generating additional income (increase counter)? This will change our cost center (real estate) into a profit center, as mentioned in the title.
What is the customization behind? The Implementation roadmap
Imagine that in the period between 2008 and 2009, one of the leading European wood producers (also one of the global players) decided to make this step ahead. The question was simple: why not profit from the existing real estates? Let’s also ensure better control and optimization of those costs – not that low from the perspective of the entire group.
The decision was taken, project started with implementing Flexible Real Estate Management, well known as SAP RE- FX under ECC 6.0. The scope was agreed – over a dozen of business entities specified as different locations. Employees from the accounting department were covered by a new company code – core of the new business (classic resources reallocation). Now was the time to tailor the management tool.
We activated EA-FIN (Financials Extension) as a prerequisite for activating Real Estate. Changes on the company code level were implemented (Accounting system, Tax codes, Defaults), no integration with Plan Maintenance (PM) or Project System (PS) was foreseen, but strong relation to Asset Accounting (FI-AA) was the key point. The existing real estate structure was mapped into SAP using RE – Navigator. The master data structure was setup from the business entity on the top to the rental object and/or contract on the lowest level.
During the implementation, all partners (business representatives and customizing consultants) were focused on process optimization (both real estate and financial ones) due to the cost impact. Only the most efficient ones read SAP standard without “troublemakers” like ABAP extensions, LSMW in use for mass change if required.
Apart from that, bad experience from previous SAP implementation within the group did not make a very auspicious start for this project.
Return on Investment was foreseen on a high level, so it was natural to create an additional contract type for intercompany subcontracting. (Even posting between company codes was forbidden).
The main advantage of it was that affiliated companies could rent from each other: offices, storage facilities/depots or even whole plants using transfer prices, especially if one of them was located in a special economic area or in a place where local tax regulations are less restricted.
Be aware that in some countries realized exchange rate differences from real estate investments can be posted into the asset acquisition value and depreciated like a regular investment, especially when you are outside the Euro-zone.
Where is the added value?
A wide range of functionalities already included in SAP Standard, especially the income calculation based on condition types that can be calculated on the fix price basis (EUR per m2) or in a more sophisticated way such as a mathematic formula – also based on other condition types. Simulation possibilities give an excellent overview of income increase on a single contract level or using a dedicated report on the whole portfolio level. Changes in the cost or income structure in the middle of the month can also be taken into consideration without implementing sophisticated customizing.
Summarizing, the main aspect of implementing REFX is the cash flow – understood as income from rental fee based on condition types and also a clear overview of the cost structure.
One asset, two modules
Let’s focus on integration with FI-AA. On the Asset Accounting side in integration part “General Ledger additional Account Assignment Objects” have been activated: IMKEY which means Real Estate Object.
Apart from the fact that it needs to be decided in which depreciation area this additional measure should be activated – just for the leading one or additional ones like tax , IFRS one too?
Based on that solution it can be registered cost of depreciation on real estate objects. This can give you a clear overview on all costs and revenues generated by this business. Activating connection between RE-FX and FI-AA is a second integration issue. “Real Estate indicator for asset class” should be defined on the asset class level. Normally other asset will be specified in this position, changing into Real Estate – property or building – allows the system to make a direct connection between asset master data and building/property master data in the asset explorer. The question is: Is it worth it? The answer is yes. Based on this small change, you can get an easy connection between information about the real estate like its address, measures e.g. and it’s real accounting value described as Net Book Value. This direct link is also available from the fix asset side (asset master data/asset explorer).
Financial integration: What is in there for me?
REFX is a part of the common SAP landscape and can be easily integrated with other SAP modules like Asset Accounting, Controlling or whole Financial Accounting, understood as GL, AP, AR, BL.
In the General Ledger, the current field status group variant should be copied into the new one and assigned to a dedicated company code. In the next step, we change field status groups to allow direct posting on real estate objects. Please be aware that this way of posting is possible only on P&L Accounts and not on Balance Sheet accounts. It can be posted on standard objects like Business Entity, Building, Property, Rental object, or contract and on Settlement objects understood as Srv. Charge Key, Settlement Unit. The problem is that you can’t post on the mentioned standard objects and settlement objects simultaneously. In our project, it was the requirement due to integration with an external Financial system.
Final overview
The main advantage of implementing REFX is that many processes that normally involves workforce are limited, main procedures are executed automatically or semi–automatically. This is due to the amount of data that needs to be taken into consideration. The main prerequisite is to build a clear structure of master data from business entity to the single contract. Postings will be done for the most part automatically so daily activities can be more focused on data validating and pure management (registering incoming payments, executing settlements, settling prepayments). Implementation and startup costs are comparable with launching a small product variance, ROI can be arranged in less than 2 years as well as the benefit from tax optimization due to different country regulations.
Summarizing, REFX can be implemented as a dedicated solution for real estate managers strictly focused on tenants, contract management, but it is also applicable for other businesses such as a supporting tool for changing cost centers into profit centers.