CASE STUDY: SAP FOR ATLAM
Akademi Teknikal Laut Malaysia (ATLAM) was established on August 1981 and privatized on January 1997. ATLAM was wholly owned organization of MICT Berhad. The mission of ATLAM was to facilitate value added learning and provide excellent services to its client. In year 2001, the management had been asked to upgrade accounting system with the PETRA group-wide SAP system. SAP was an integrated business application package that covered most functions of an organization. Before year 2001, ATLAM relied on a customized single-user system which solely is used to enter accounting entries.
The system is unable to generate financial report. Finance manager of ATLAM, Zulkifli Osman had to assess the risk associated with the decision. Implementation of SAP system seems to be giving big impact on the company’s financial status. Firstly, the implementation of SAP system will increase expenditure drastically which is around RM5,000,000. Besides that, the cash flow of ATLAM at December 2001 was a deficit.
Issues & Solutions of the Case
i) Recognition SAP System as an asset in accounting
Long-lived nonmonetary assets are the assets which are nonmonetary and provide the benefits to the entity for several years.
Generally, SAP system is categorized as long-lived nonmonetary assets because it will provides the accounting services for ATLAM for several years. Tangible asset is an asset that has physical substance. For intangible asset, it has not physical substance such as intellectual property or goodwill (Anthony, Hawkins & Merchant, 2011). SAP system basically fulfill the characteristic of intangible asset which it doesn’t have physical substance. However, SAP system is a tangible asset. According to Governmental Accounting Standards Board (GASB) Statement No. 42, Accounting of Costs of Computer Software Developed or Obtained for Internal Use., if purchased computer software package costs more than $100,000, it must be capitalized. Therefore, when the asset is capitalized, it is consider as tangible asset. Besides that, the cost of SAP system is almost RM5 million which is a very huge amount for ATLAM.
Implementation of SAP system obviously is beyond the cash flow capacity of ATLAM. It is further support by the fact of some of companies recognized their computer software and system under category of property, plant and equipment (PPE) which they depreciate it just like tangible asset. For example, annual report of Axiata Group Berhad on year 2012 shows the depreciation rate of computer supporting system is 3 to 5 years (Axiata Group Berhad, 2012,p.185).
ii) Impact of implementation of SAP system to company cash flow Implementation of SAP system will heavily impact the cash flow for the company. Therefore, it will show a great loss in company financial statement for the particular year. In order to resolve this issue, there are two recommended solutions.
Finance Manager, Mr. Zulkifli Osman may need to negotiate with the parent company, MICT Berhad on the implementation on SAP system in ATLAM as the cost of SAP system is extremely high. He may request the MICT Berhad to fully subsidize ATLAM to purchase the whole system. In other words, MICT Berhad purchases the system and installs the system on ATLAM. If the management of MICT Berhad agrees with decision, the financial problem which may encounter by ATLAM can be resolved.
In case the MICT Berhad doesn’t agree to fully subsidize the ATLAM on the SAP system, Mr. Zulkifli Osman may negotiate with the Petra’s Group in order to get cheaper price of the system. Since ATLAM need to purchase the system and obviously their cash flow doesn’t allow them to pay a high amount of initial cost, therefore, it is suggested that the payment to purchase the system is paid by installment basis. Mr. Zulkifli Osman needs to deal with software provider in order to settle the payment by monthly installment for a long period. By doing so, the cash flow of the ATLAM may show lower expenses. Then, appropriate and suitable method of depreciation is used to determine the depreciation expenses of the system.
iii) Determine the depreciation expenses of system
Depreciation expenses is a fraction cost of an asset which is chargeable as expenses in each accounting periods in which the asset provides service to the entity (Anthony, Hawkins & Merchant, 2011). For this case study, straight-line method is selected to calculate the depreciation expenses as this method is commonly used and it is simple. Some of the companies are using straight-line method to depreciate their asset particular on software and computer like MAXIS, Affin Bank and Air Asia. Accelerated method is not suitable to use because it shows very high depreciation expenses as compare to straight-line method. Straight-line method distributes equally the depreciation expenses over the period of service life. Hence, straight-line method is more appropriate to be used to calculate the depreciation expenses of SAP system.
From the case study, the cost of SAP system is around RM5 million. The service life will be assumed on 5 years. This assumption is made as a lot of companies are applying the same service life to the computer and software system. For example, the annual report of Axiata Group Berhad and Green Packet Berhad on year 2012 shows that the depreciation method for computer support system is 3 to 5 years (Green Packet Berhad, 2012, p .79). Therefore, the depreciation rate will be 20% per year. No residual value is considered for the calculation as the residual value is difficult to estimate. The depression expenses of SAP system is shown as below:
Book value at beginning of the year
Depreciation for the year (Total cost x depreciation rate per year) Book value at the end of the year
Account for depreciation expenses at end of the year
From the table above, the depreciation expenses is RM1 Million per year which still consider high for ATLAM. Therefore, it is crucial for ATLAM to resolve the issue by using solution 1 and solution 2 in order to show a better financial statement.
Anthony, R. N., Hawkins, D. & Merchant, K. (2010) Accounting: Texts and Cases. Asia: McGraw-Hill/Irwin Accounting for internal software. (1998) Retrieved from http://www.fasab.gov/pdffiles /fasab10.pdf Morah, C. (n.d) In Investopedia. Retrieved from http://www.investopedia.com/ask/answers /09/computer-software-intangible-asset.asp Axiata Group Berhad (2012) Annual Report. Retrieved from http://axiata.listedcompany. com/misc/ar2012.pdf Green Packet Berhad (2012) Annual Report. Retrieved from http://www.greenpacket.com /downloads/annualreports/Green_Packet_AR_2012.pdf
Cite this SAP for Akademi Teknikal Laut Malaysia (ATLAM)
SAP for Akademi Teknikal Laut Malaysia (ATLAM). (2016, Oct 21). Retrieved from https://graduateway.com/sap-for-akademi-teknikal-laut-malaysia-atlam/