Problem 1: Implementation of SAP would bring loss to ATLAM

As mentioned in the first meeting on Friday, 22 January 2002, the cost of

implementing SAP in ATLAM within 4 months towards the end of the financial year
of 2001 is definitely high. It is impossible for ATLAM to bear the SAP cost without
incurring a loss. The initial investment is detailed as follow:
Initial investment RM
Hardware 2,000,000.00
Initial software license 1,000,000.00
Training cost 1,271,550.00
Customization work 72,840.00
Total 4,344,390.00

Figure 1: SAP initial investment

Categorizing the SAP implementation as operating expenditure will definitely
contribute to a high expense for ATLAM. Operating expenses will be recorded in the
current periods income statement (profit and loss statement/ P&L) thus directly
affected the performance of the company.
Balance Sheet Income Statement
Assets = Liabilities + Equity

Net Income = Revenue - Expenses
- SAP expenses

Figure 2: SAP investment represented as operating expenditure


POSSIBLE SOLUTION
1. Recognize SAP as noncurrent asset (capitalize the expenditure)
Since the SAP investment will have an economic benefit that extends beyond the end
of the current fiscal year, the expenditure should be capitalized. This would mean that
the SAP investment should be recognized wholly as a noncurrent asset. The method is
further shown below in Figure 3:
Asset Categorization RM Total
Tangible noncurrent assets:
Hardware
Customization work
Training cost
2,000,000.00
72,840.00
1,271,550.00


3,344,390.00
Intangible noncurrent asset:
Initial software license 1,000,000.00 1,000,000.00
Total 4,344,390.00

Figure 3: asset categorization

Although this categorization diversifies the noncurrent assets into intangible and
tangible items, their representation in the balance sheet will be solely recognized as
noncurrent asset. Figure 4 will show how it will be represented.
Balance Sheet Income statement
Assets = L + OE Net Income = Revenue - Expenses
+ SAP 4,344,390.00

Figure 4: SAP investment representation in balance sheet
When expenditure is capitalized, assets will increase. Since the SAP investment will
be considered as capital expenditure, the investment will not affect the profit and loss
of the company (income statement). Rather, it will only be recorded as noncurrent
asset and experience depreciation over its useful life.

2. Recognize the contribution of PETRA as the holding company
Now that the expenses value has been capitalized, we should not leave the fact that
PETRA as the holding company contribute more than 80% of the overall capital
expenditure of ATLAM. This fact needs to be emphasized, as it would mean that
ATLAM only bears minimum expenses of its organization thus bearing an even more
minimum cost of implementing the SAP system.

3. Request training from holding company
The SAP Business Support, who has been working on several SAP projects with
PETRA units before, is now providing the training in ATLAM. It is estimated that the
cost of training would sum up to RM 500,000 in the first year of SAP implementation.
Requesting support from the skilled workers of PETRA will minimize the cost of
using the experts of the SAP team itself.