Dear,
Managing Real Estate Properties has become an important activity for banks all over the world.
Since the burst of the US Real Estate bubble on 2007 and later in other countries, banks have covered their potential losses taking ownership of the Real Estate Collaterals of their failed Mortgage Loans.
Some of those Real Estate properties are activated by being rented to the market, becoming Financial Assets whose value must be determined according to the regulations of the International Financial Reporting Standards.
On May 2001, the International Accounting Standards Board (IASB) issued IFRS 13 (Fair Value measurement), as a single source of guidance for measuring the fair value of Financial Assets, including Real Estate Lease Out contracts.
http://www.ifrs.org/Documents/FairValueMeasurementFeedbackstatement_May2011.pdf
http://www.ifrs.org/Current-Projects/IASB-Projects/Fair-Value-Measurement/Pages/Fair-Value-Measurement.aspx
http://www.iasplus.com/en/standards/ifrs/ifrs13
According to IFRS 13, there are generally three approaches that can be used to derive fair value: the market approach, the income approach and the cost approach. To measure fair value, management should use valuation techniques consistent with one or more of these approaches.
Real estate assets are often unique and not traded on a regular basis, producing lack of observable input data for identical assets. For that reason, the income approach is the preferred method for real estate fair value measurement. Consequently, fair value measurements of real estate assets will require the following inputs.
- Cash flow forecast using the entity’s own data
- Yields based on the management estimation
- Yield adjustments based on management’s assumptions about uncertainty/risk
- Assumptions about future development of parameters (for example, vacancy, rent) that are not derived from the market
The Flexible Real Estate module of SAP Enterprise Core Components provides strong functionalities for the management of Real Estate Assets, including Cash-flow generation from the financial conditions of the Lease Out contracts, which can be the foundation for the cash-flow forecast required by IFRS 13.
On the other hand, Flexible Real Estate lacks on strong functionalities for Yields determination and adjustments based on potential counterparty or market events (Counterparty and Market Risk).
Fortunately, we have the option of taking advantage of the SAP Bank Analyzer capabilities for the generation and management of the required inputs and the subsequent valuation of the Lease Out Contracts according to the income approach, or what is the same, the discounted cash-flows valuation technique.
For doing that we need to follow some basic requirements for the integration of the Lease Out contracts on the Financial Database of SAP Bank Analyzer.
The first activity is modeling the Lease Out contracts as Financial Transactions on the Bank Analyzer Source Data Layer by creating a specific template.
Once the Financial Transactions are created in the Source Data Layer, we can transfer the cash-flows generated in SAP Flexible Real Estate module to the Bank Analyzer-Source Data Layer. Alternatively, we can transfer the Lease Out contract Financial Conditions and reproduce the cash-flows generation in the Bank Analyzer SDL.
For the transfer we can use SAP Services or the Extract and Transformation Layer of Bank Analyzer. Since release 8.0 Bank Analyzer has very powerful functionalities for transferring Financial Assets with SAP Services, and in my opinion is also the best option for integrating Real Estate contracts.
Additionally, we’ll have to create new Business Transaction classes and Types, and the correspondent Items, for modeling in the Source Data Layer the accounting events posted on the Lease Out contract.
Finally we’ll have to adjust the calculation procedures of the Processes and Methods Layer for supporting the new Business Transaction Types.
Planned and Actual Maintenance costs of the Real Estate properties are managed by the Plants Maintenance module of SAP ECC, and transferred to Bank Analyzer as expected and actual cash-flows, for generating the correspondent accounting entries in the Lease Out contract sub-ledger.
In conclusion, combining Flexible Real Estate and Bank Analyzer, SAP provides a holistic solution for the management of Real Estate contracts, according to the most recent regulation of the International Accounting Standard Board.
Join the SAP Banking community at: http://www.linkedin.com/e/gis/92860
Looking forward to read your opinions.
K. Regards,
Ferran.
Managing Real Estate Properties has become an important activity for banks all over the world.
Since the burst of the US Real Estate bubble on 2007 and later in other countries, banks have covered their potential losses taking ownership of the Real Estate Collaterals of their failed Mortgage Loans.
Some of those Real Estate properties are activated by being rented to the market, becoming Financial Assets whose value must be determined according to the regulations of the International Financial Reporting Standards.
On May 2001, the International Accounting Standards Board (IASB) issued IFRS 13 (Fair Value measurement), as a single source of guidance for measuring the fair value of Financial Assets, including Real Estate Lease Out contracts.
http://www.ifrs.org/Documents/FairValueMeasurementFeedbackstatement_May2011.pdf
http://www.ifrs.org/Current-Projects/IASB-Projects/Fair-Value-Measurement/Pages/Fair-Value-Measurement.aspx
http://www.iasplus.com/en/standards/ifrs/ifrs13
According to IFRS 13, there are generally three approaches that can be used to derive fair value: the market approach, the income approach and the cost approach. To measure fair value, management should use valuation techniques consistent with one or more of these approaches.
Real estate assets are often unique and not traded on a regular basis, producing lack of observable input data for identical assets. For that reason, the income approach is the preferred method for real estate fair value measurement. Consequently, fair value measurements of real estate assets will require the following inputs.
- Yields based on the management estimation
- Yield adjustments based on management’s assumptions about uncertainty/risk
- Assumptions about future development of parameters (for example, vacancy, rent) that are not derived from the market
The Flexible Real Estate module of SAP Enterprise Core Components provides strong functionalities for the management of Real Estate Assets, including Cash-flow generation from the financial conditions of the Lease Out contracts, which can be the foundation for the cash-flow forecast required by IFRS 13.
On the other hand, Flexible Real Estate lacks on strong functionalities for Yields determination and adjustments based on potential counterparty or market events (Counterparty and Market Risk).
Fortunately, we have the option of taking advantage of the SAP Bank Analyzer capabilities for the generation and management of the required inputs and the subsequent valuation of the Lease Out Contracts according to the income approach, or what is the same, the discounted cash-flows valuation technique.
For doing that we need to follow some basic requirements for the integration of the Lease Out contracts on the Financial Database of SAP Bank Analyzer.
The first activity is modeling the Lease Out contracts as Financial Transactions on the Bank Analyzer Source Data Layer by creating a specific template.
Once the Financial Transactions are created in the Source Data Layer, we can transfer the cash-flows generated in SAP Flexible Real Estate module to the Bank Analyzer-Source Data Layer. Alternatively, we can transfer the Lease Out contract Financial Conditions and reproduce the cash-flows generation in the Bank Analyzer SDL.
For the transfer we can use SAP Services or the Extract and Transformation Layer of Bank Analyzer. Since release 8.0 Bank Analyzer has very powerful functionalities for transferring Financial Assets with SAP Services, and in my opinion is also the best option for integrating Real Estate contracts.
Additionally, we’ll have to create new Business Transaction classes and Types, and the correspondent Items, for modeling in the Source Data Layer the accounting events posted on the Lease Out contract.
Finally we’ll have to adjust the calculation procedures of the Processes and Methods Layer for supporting the new Business Transaction Types.
Planned and Actual Maintenance costs of the Real Estate properties are managed by the Plants Maintenance module of SAP ECC, and transferred to Bank Analyzer as expected and actual cash-flows, for generating the correspondent accounting entries in the Lease Out contract sub-ledger.
In conclusion, combining Flexible Real Estate and Bank Analyzer, SAP provides a holistic solution for the management of Real Estate contracts, according to the most recent regulation of the International Accounting Standard Board.
Join the SAP Banking community at: http://www.linkedin.com/e/gis/92860
Looking forward to read your opinions.
K. Regards,
Ferran.
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