Lease Accounting Insights

We have engaged with several individuals and companies as we have developed our lease accounting product offering through business development, hosting round tables, and other interactions. We are sharing our insights and tidbits of knowledge we believe will help as you implement the new lease accounting requirements. Our implementation methodology focuses on the following categories:

Organizational Readiness

We believe it paramount to validate all stakeholders internal and external that will be impacted by the implementation process. Some obvious examples are finance and accounting, procurement, and business units. Some not so obvious stakeholders might be legal (e.g., contracts with imbedded leases), risk management, leasing companies, and financial institutions (e.g., covenant impact and potential evolution to incorporate the new standards).

The appropriate level of governance for your organization will begin the process of integrating appropriate stakeholders, and will provide a defined approach to meeting the standards and extracting as much value as possible from the required implementation.

A strong Program Management Office (PMO) will allow for adequate communication throughout the organization, including executive management and the board, and will also provide the appropriate level of planning and project management to make sure all stakeholder needs are met.

Inventory Process

Make sure you’re asking the right questions… “lease” may not mean the same thing to everyone, especially as your company may span across the globe. A humorous anecdote we were told related to a piece of equipment in a warehouse that was not on the asset register. In response to a question, the answer was that no we don’t own or lease that, we “rent” it. Installment payments on a credit card or other nontraditional payment methods may be lurking throughout your organization, so asking the right questions becomes very important. Remember that language may also be a barrier in an international setting as some things can be lost in translation.

How will the data be used? If you already have an IT tool in place, you can leverage your inventory process directly into the tool. However, if an IT tool is still pending, you will need to make sure the inventory process is accumulated in a way that provides for direct upload into a future tool. You may not be able to prevent missing some data inputs, so design your data set with a broad perspective relative to the lease accounting standard.

Process documentation can play an important part within this effort. If there is an existing process, you can leverage that process to determine where leases should exist. If there is no process, it will be the perfect opportunity to implement an appropriate process. Regardless of the existence of a process, the compliance with the new standard will need to be integrated into the future process, including the use of any identified tools. This is also a perfect time to identify the key controls that will need to be implemented to satisfy internal and external audit needs.

Leases may be lurking in the corners of other contracts. There may be a need to evaluate business contracts in search of imbedded leases or other arrangements that will be subject to the new standard.

IT Solutions

If there is an existing tool, you may want to create a requirements inventory similar to developing a RFP. The requirements can then be vetted relative to the existing tool. The tool will then either be verified or a gap will be identified that can be addressed with the vendor or internal development team. The analysis can also be performed on if the gap can be overcome or if an RFP is necessary to identify a new tool.

The requirements inventory above will most certainly be necessary if there is not an existing tool and a tool will be necessary to facilitate the implementation of the standard. A successful RFP is built on the foundation of a strong requirements process, providing the highest probability of a successful tool selection and implementation.

Many of the tools are centered on the concept of either real estate or equipment. Research of each vendor should shed light on the pedigree of the tool and an internal analysis can be performed to determine the organization’s lease focus. Vendor selection should take this into account to drive the highest probability of a tool’s success.

Also, please keep in mind the integration of any tool with the other systems within your IT ecosystem. ERP and reporting integration will be vital to the ultimate success of any tool selected.

Do not waste time if a new system is needed, many vendors and integrators are already showing signs of resource shortages and extended implementation time lines.

Technical Accounting Strategy

Every company will need to determine when or if they need to engage an external accounting firm. Ultimately, the lease treatment will be subject to the audit process, so involvement of the external resource will ultimately create a proactive vs. reactive environment. Some of the tools also have a genesis within the Big 4 firms, so early communication can also prevent a situation where there could potentially be a conflict of interest.

There may be a number of reasons to leverage technical accounting expertise, including lease complexity, industry specific treatment, competitor treatment, etc.

Process Improvement

If there is an existing process, this is the perfect opportunity to evaluate the existing process and determine if it is fully integrated with the procurement process or leverage the opportunity to improve upon the past process. Controls may need to be improved, evolved, or added to meet the new standard. This is an intersection of all stakeholders and if evaluated appropriately all can benefit. Efficiency and effectiveness can both be enhanced as part of the standard implementation, which can provide value in perpetuity. For example, consolidation of controls can improve efficiency within the operation, reduce internal audit resource needs, reduce residual risk, and increase reporting efficiency through automated reporting. Time and resource value can be a byproduct of a successful process improvement project.

Business Value

Many times, the compliance with emerging standards is looked at strictly as a cost or overhead. There are all sorts of possibilities for adding value as part of complying with the new standards. Here are a few value propositions that we have come across:

Asset reconciliation can identify assets that are no longer on the books and can be written off. Leases may be dispersed across several lessors, and a centralization of leasing may provide economy of scale and more negotiation leverage with aggregated relationships.
Reviewing the lease may also identify some terms that have not been executed to the benefit of the lessee (e.g., de-escalators) or terms that need to be renegotiated as part of the next renewal cycle.
A lease vs. buy analysis can also be developed or evaluated as part of the implementation. For instance, the new standard may provide indirect cost to the formula that no longer makes leasing the best option.
There may also be leases were the equipment is no longer in use and the automatic renewal was not appropriately terminated.
A contract management process may also be necessary to accumulate and centralize all contracts for the organization, which will benefit multiple stakeholders.
Proactive identification of bank covenant scenarios that could impact the organization’s cash position and strategy.

Related Resources

About Core Catalysts

Core Catalysts is a management consulting firm based in Kansas City, and we serve clients across the U.S. in various industries. Core Catalysts provides services such as process improvement, product/service commercialization, revenue enhancement, financial modeling, program/project management, software selection, enterprise risk management and business performance improvement through a team that is composed of results oriented individuals.

Authors

Greg Wallman
Senior Manager
Greg.Wallman@corecatalysts.com

Key Contacts

Jim Wadella
Managing Member
Jim.Wadella@corecatalysts.com