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Asset management, AROs, and calculating obligation requirements: Q&A with Nathan Genez (transcript)

by Kristine Erickson

April 2, 2012

For finance teams, fulfilling regulatory requirements for long-life fixed-asset retirement obligations (AROs) often involves constant monitoring, point solutions, and external spreadsheets. There’s a new solution - SAP Asset Retirement Obligation Management (AROM) – currently in rampup. How will this solution change your manual approaches to ARO accounting?

Financials 2012 speaker and SAP Financials expert Nathan Genez of Serio Consulting took questions on March 29 in Insider Learning Network’s Financials Forum. Topics covered included an overview of the new SAP AROM solution, including integration with current SAP systems, GAAP compliance, inflation calculations, and reporting.

The forum was moderated by Allison Martin, Conference Producer,  Financials 2012 US & Financials 2012 Europe.

Allison Martin: Thank you for joining us today! In this one-hour forum, we invite you to ask your questions on Asset Retirement Obligations (AROs) in SAP.

I’d also like to thank Nathan Genez for taking questions today! Nathan is a former Platinum Consultant with SAP America Inc. and is currently a Managing Partner at Serio Consulting. Nathan is also a technical advisor and author for Financials Expert. He has just come back fr om presenting a number of sessions at the Financials 2012 event in Las Vegas, and we’re very happy to have him here discussing one of his session topics: AROs and SAP’s new solution for ARO calculations, SAP Asset Retirement Obligation Management. 

Nathan, as you respond to questions here, members can post their specific questions, and we can also throughout the hour talk about evaluating the new solution from SAP, integration issues, how it will impact current processes, and other issues.

 

Keven Purnell: Our current process is to calculate the AROs in Excel.  We have to estimate the cash requirements out for several years and then perform the calculations to get the net present value for each obligation. SAP can now do this?

Can it handle adjustments and subsequent changes to cash amounts?

Nathan Genez: Yes.  The new solution... the full name is SAP Asset Retirement Obligation Management...  allows you to handle an ARO in the following manner:

1.An ARO is created with some basic parameters such as its setup date, interest rate and inflation rate keys (basically, a variant to a configuration table), the asset class for the ARO asset, and some other items.

2.For each ARO, there are multiple Cost Estimation Plans (CEP) where the specifics of your cash outlays can be recorded.  For instance, you could create a CEP for $1MM that is valid for the next 30 years.  You can create multiple transactions within a CEP in situations where the obligation requirements are staged over several years. 

3.Once you've entered the CEP, the ARO essentially has its financial value.  There is a component within ARO that does the calculation.  It inflates the cost estimate you entered earlier out to its expected settlement date (30 years in the above example), and then does the NPV calculation to find out how much is required to setup up the liability today.

4.Once the ARO is released, an FI posting is made to setup the liability and the associated ARO asset in fixed assets.

For your second question, yes, subsequent changes to the initial cost estimation can be made.  After all, it's reasonable to expect that the cost of removal might change as the asset (antenna, oil rights, asbestos litigation) grows in size/value.

Allison: Nathan, can you provide a quick overview of the challenges of ARO calculations from an accounting perspective?

Nathan Genez: Well, the challenges of the calculation are that they're currently done offline.  As Keven points out, it's usually done in Excel.  From what I've seen at every customer that has tracked AROs, it's always done in Excel.  That's not a controlled environment.

Probably the second challenge with this is a lack of integration.  Once you calculate the ARO value in Excel, you have to load it into SAP ERP.  Then you have to load the periodic accruals each month to record the ARO's accretion expense.  If you have a lot of AROs, that's a lot of spreadsheets to maintain and a lot of uploads to make. 

SAP's solution is (obviously) integrated with FI-GL so that all of these postings are made on a monthly basis.  It's also integrated with fixed assets (FI-AA) so that changes to the ARO (ex. termination) can be reflected in the associated ARO asset.

Gary Byrne: Hello, Nathan, Thanks for taking time today to answer our questions. Here is mine: How is AROM integrated with SAP ERP Financials, including General Ledger, FI-AA, and Lease Accounting (FI-LA)? 

Nathan Genez: I guess I answered some of that with Allison's question.  To bullet it out...

- FI-GL -- the AROM solution integrates with the GL for the initial setup of the ARO liability and the periodic postings of accretion expense.  The latter is handled by another utility within FI called the Accrual Engine.  It handles the management of periodic accruals such as this quite well.

- FI-AA -- For every ARO, an associated ARO asset is also setup.  This is a virtual asset, not a true fixed asset because it's not a tangible piece of equipment / property.  Nonetheless, you are allowed to depreciate the value of the ARO liability amount.  When the ARO is released, the fixed asset record is automatically created and posted to.  From there, normal FI-AA functionality takes over in terms of depreciating the asset along with all other assets in the subledger.

- FI-LA -- LA is not directly used or required, but there is a component of it called the Lease Accounting Engine (LAE) that is leveraged by AROM.  To describe it...  LAE serves as middleware or an integration layer for this SAP solution. For example, when the AROs are valuated and released it is LAE's job to reach out to the GL and make the initial FI posting. It is LAE's job to reach out to FI-AA to create and post to the new fixed asset record.  LAE is delivered pre-configured (mostly) so it's not something that should be seen or interacted with once the AROM solution is operational.

Scott Wallask: Hi Nathan, nice to see you on the forum today. Do you know how SAP ARO calculates inflation changes? Is that automated at all in ARO or is it just the result of someone monitoring the rates externally?

Nathan Genez: The initial inflation calculation as part of the ARO's valuation is definite ly automated. For US GAAP, inflation rate changes aren't supposed to influence the value of the ARO so they won't trigger a change in the ARO's provision value.

AROM is also supported for IFRS and German HGB and I believe they handle inflation rate changes differently.  In their case, the ARO value will change.

Keven Purnell: Is the ARO solution compliant with FASB 143?

Nathan Genez: Yes, SAP's AROM solution is compliant with US GAAP. 

AROs were originally documented in FAS 143 and subsequently clarified in FIN47 because there was not much conformity in the market.  Currently, AROs are governed by ASC 410.

If you go to asc.fasb.org/viewpage and then enter in 410 in the Codification field, you should find the most current US regulation.  The site requires that you register but it's free.

 

BridgetKotelly: Does this solution replace manual spreadsheets for managing appraisal and bid estimates for AROs? 

Nathan Genez: Absolutely. If you get a bid for the retirement, that is what is used for the CEP valuation.  For instance, if a bid for $100,000 is issued to remove a cell phone antenna from a commercial building, that $100k is entered into the ARO's CEP.  From there, it is inflated out to the expected retirement date (in AROM, it's referred to as the settlement date) and then calculated back to today to get the NPV.  You can even view a cash flow report that will show the ARO starting value, interest cost, and ARO ending value per fiscal period.  This is what I've commonly seen in customer's ARO sprea dsheets... but now it's all within ERP.

 

Keven Purnell: I have one more question regarding the calculations.  Is it possible to view the technical steps of the calculation to confirm the calculated amounts? What's the reporting like? 

Nathan Genez: Yes you can view (in great detail) how SAP calculated the ARO values.  This can be done on each individual CEP (transaction).  It's very informative in showing how SAP calculated the ARO, what dates were used in the calculation, what rates were used, etc.  It breaks it down into multiple Calculation Steps... lots of detail.

Reporting is good.  Most people seem to need basic lists of what AROs they have, when do they settle/expire, what are the values today and what are they expected to be xx years from now, etc.  From what I've seen so far, the delivered reports provide this information.  They are also ALV formatted and the selection criteria is quite good.

In addition, SAP has delivered a structure based report that will display the ARO values in a freely definable grid.  You can, via configuration, define your own column/row/cell structure and map which values are shown where.  This is not a report painter/writer report...  it's just a configuration variant within the AROM solution.

 

Nathan Genez: Currently, AROM is still in RampUp but it will most likely be generally available sometime in Q2 of 2012. 

The best place to get some information on AROM from SAP is on the SAP Help portal.  There are links to the installation guide, official documentation (which is quite good) and some important OSS notes: help.sap.com/aro

 

Allison: Just to follow up on the question about SAP AROM reporting…

 

If you’d like to get a sense of the look and feel of SAP AROM, you can download an excerpt from Nathan Genez’s presentation on SAP AROM from the recent Financials 2012 conference. Just register for today’s Q&A here to receive the download– and if you’ve already registered, look for the download link in your confirmation email.

A full summary of all the questions will be available here in the Financials Forum and in the Financials Group. I encourage you to join these groups for ongoing information and additional resources, and you can post your questions at any time here in the Financials Forum.

And thanks to Nathan Genez of  Serio Consulting for joining us today! 

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