Lease Accounting

New lease accounting standards are beginning in 2019 and require companies to record the value of all leases with terms of more than 12 months on their balance sheets. The goal is to increase transparency and global consistency. Collection of this lease information can be challenging as leases are currently hidden throughout many departments, locations and disparate financial applications. For large companies this means sorting through and extracting relevant information from thousands of leases and pieces of paper not currently in any systems or in many cases, in different languages across multiple countries.

Preparation. Challenges. Strategic opportunities. Are you ready?

The new rules are requiring more effort than expected, and impacting many company processes in budgeting, reporting, procurement, IT and daily operations, and managing and educating the financial impact.    Full FASB (ASC 842) and IASB (IFRS 16) lease accounting standards

Think this is just financial reporting? Think again.

From strategy and governance to lease inventory through LeaseCaptureSM – We’re here to help.

Contact Us today!

LEASE ACCOUNTING – LEARNINGS, TIPS & TRENDS

PREPARATION & DATA EXTRACTION

1. Experienced program management is critical to a successful transition. Assuming success is defined as meeting quality compliance in the most efficient and least cost and time-consuming manner.

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The Project Manager is a key role in driving decisions, outcome and the implementation of the compliance transition. The Project Manager works strategically, tactically and functionally to plan and integrate new compliance standards across the company. A qualified project manager will manage and preempt change along the way and overcome potentially costly project pain points. The management of your transition will greatly impact the delivery of your balance sheet.

The main reasons projects fail:

  • Unclear objectives and scope changes
  • Resource strain from lack of planning and proper alignment
  • Failure to plan
  • Unrealistic deadlines
  • Unclear dependencies
  • Poor communication
  • Disengagement of end users
  • Lack of strategic support
  • Insufficient team skills
  • Poor cost and scheduling estimation

Bringing in third parties or consultants experienced in the process and change management can greatly reduce the resource strain of any change. Read more about other time savings ideas on our Lease Accounting site or give us a call at 913.752.9400.

2. Centralized lease capture can dramatically speed the collection process– especially for large companies with company-wide lease distribution.

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For companies that are distributed in structure with separate finance/accounting functions in each business unit, there are several strategy options for the collection and processing of their leases.

One option is to remain handling the compliance efforts in a decentralized manner, by training each business unit and expecting each one to fully understand, adopt and standardize the correct financial reporting processes. In theory, remaining decentralized can be a good strategy. However, in most cases this turns into a time-consuming and resource-burning exercise due to the complexity of this new accounting standard coupled with the newness of the compliance process including the external auditors’ guidance. Expect to be continually communicating new rules, standards, software updates and process changes to this entire group of people impacted by lease accounting changes, vs a centralized group, throughout this process and moving forward. If a company chooses this approach, then leading practices would suggest treating this as a large ‘change management’ effort similar to implementing a new ERP for example. It is highly recommended that a strong process and communications plan be developed and implemented to help the field organizations with the compliance efforts.

Another option to centralize the collection and processing of the leases creates several benefits. First, the collective time and effort will be greatly decreased since a limited set of people will be reviewing the leases and applying consistent processes to the reviews and collection of appropriate data. Next, since a smaller group of people are involved in review and decisions, feedback from the external audit guidance process can be applied more quickly.

In all cases, it is best to examine the organizational impact as part of the planning process.

Read more about other time savings ideas on our Lease Accounting site or give us a call at 913.752.9400.

3. Use appropriate tools given the quantity of leases you have – more than 100 leases likely put companies into tools like LeaseCaptureSM and formal lease management software.

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We have seen some clients try to take on the inventory and management process using MS Excel for their lease population. The finance and accounting team is usually heavily involved using their go-to tool of Excel. Yes, they are typically Excel power users, but they are creating this entire process from scratch, learning and designing standards on the go while experiencing the residual impact of resource consumption from seemingly small decisions.

One may ask the question ‘haven’t other across the US dealt with this already and taken the time to develop appropriate tools for the collection and management of leases?’ Is there an easier way?

There are many examples of tools that have been developed and are being used and already ‘battle tested’. Core Catalyst’s LeaseCaptureSM is a software tool to help teams, ours or yours, with the complex process of collecting and documenting leases and all the pieces of information that go with them. On average we’ve found each lease contains 10 documents! Proper tools and data management have suddenly become even more essential for appropriate lease treatments to be applied per the new FASB standards.

The LeaseCaptureSM tool was built to save companies significant time, resources and learning curve versus building something on their own in MS Excel or waiting for a new Lease Management software acquisition and implementation. Visit our LeaseCaptureSM page for more information.

Another option is the use of existing lease management tools in place at the company. Decisions need to be made for replacing or co-existing with the tools/applications already in place (Real Estate is the most common example). It is expected that modifications will be required to integrate the new standards into existing tools.

Read more about other time savings ideas on our Lease Accounting site or give us a call at 913.752.9400.

CHANGE MANAGEMENT & KEY DECISIONS

4. Change management is key for becoming compliane in the most efficient manner.

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Change Management = the controlled identification and implementation of required changes to ensure successful transitions.

Change management techniques should be used when implementation change and the following situations exist: introducing new processes and procedures, distributed organization structure, many different business units/entities with autonomous authority, management responsibilities are spread throughout multiple organization groups (for example: real estate, procurement, finance and accounting, information technology, fleet management). Change management is a term typically used for implementing new, major applications like ERPs, CRMs, etc. because of the signification cross-functional integration impact.

FASB lease requirements, ‘just an accounting change’, right? Wrong! The reality is these changes are suddenly impacting many currently disconnected aspects of your company, including job roles, software systems and operational processes. The companies that take this on as a change management effort, identifying and planning along the way, are the companies that have the most successful transitions. Bringing in third parties or consultants experienced in the process and change management can greatly reduce the resource strain on any change.

Change management techniques are not one time in nature, rather, they are used throughout a complex program/project and serve as the ‘glue’ that keeps all efforts heading in the right direction.

Read more about other time savings ideas on our Lease Accounting site or give us a call at 913.752.9400.

5. Make Practical Expedient decisions early – to maximize the data collection efforts and minimize rework.

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Practical expedient decisions can affect the data capture part of the lease inventory process. Be sure to make these decisions early in the planning of the data collection efforts.

FASB added the choice of companies to use the practical expedients in order to simplify the collection and reporting process. We have found that leading practices point toward making this decision early in the lease collection and consolidation process in order to minimize rework.

The practical expedient option is intended to provide lessors with a way to not separate non-lease components from the associated lease components when certain criteria are met; requiring accounting for the combined component in accordance with the new revenue standards.

While this option may seem like a small time savings, when chosen early in the process it can greatly expedite the data capture process. An example of this would be in Real Estate leases.

In this example, assume each lease requires two hours to review and extract the correct information. Then this time would equal 2,000 man-hours per 1,000 leases when done on the front end of th elease collection process. If the practical expedient option is chosen during the inventory process, savings would be applied, but additional rework to revisit each lease would also be incurred (say 500 man-hours per 1,000 leases based on our experiences).

Read more about other time savings ideas on our Lease Accounting site or give us a call at 913.752.9400.

6. Payment Calculations can be complex and difficult – set your standards early and communicate often to the team that is making these calculations.

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The new FASB standard can make the actual calculations of payments a complicated process and subject to various interpretations. Any inconsistencies in standards cause frustration, additional rework time in the data collection process, and affect future audits from your friendly external auditors.

Spending more time on the front end with defining the standards and approaches for the calculations will pay future dividends. This couple with frequent communications and training to those involved with lease management should reduce the risk.

Read more about other time savings ideas on our Lease Accounting site or give us a call at 913.752.9400.

VENDORS & VALUE – NEW!

7.  Lease Management software is suddenly changing fast! – as vendors are also reacting to the new requirements and new market needs.

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New versions of lease management software are being released sometimes monthly causing a consistent stream of new issues like user education, data imports and basic calculation changes. This makes it especially confusing to choose and manage your lease management software.

There are many aspects to consider when it comes to lease management software. Internal decisions such as integrating with the company ERP(s) and the strategy for updating/collecting leases to balance sheet, the existence of existing lease management software (Real Estate software is common), and the number and variety of leases in the organization.

When choosing lease management software consider the following:

  1. There are MANY vendors in the space and more entering every day – take time to review the options; talk to early adopters and vet the vendors.
  2. Define a clear strategy for implementing third party software with your existing financial systems – this will typically involve the IT group, finance and accounting and other groups.
  3. Realize that MOST vendors are just now incorporating the requirements for the lease accounting standards into their software development cycle. Look for software firms that have teamed with accounting firms to maximize the development cycles and represent the end users of the software (your teams). The more changes they have adopted already, the less modifications you will be making in your process along the way.
  4. Ask vendors about their release cycles – how many new releases have happened over the last 12 months; how many are planned over the next 12 months? Are there existing user groups and are they providing feedback? Are they providing training? How is the vendor handling their changes?
  5. How do the vendors import and export data out of their systems? Yes, most will say comma delimited flat files, but there is significant complexity in the lease data and how it is initially captured before the new software is selected and implemented. Ask to see a sample data export and determine the usability of the file or rework required.

Bringing in an unbiased third party or consultants experienced in this decision process can greatly maximize the results and minimize potential resource strain on people, processes and systems.

Read more about other time savings ideas on our Lease Accounting site or give us a call at 913.752.9400.

8.  Continually look for business value opportunities during the compliance efforts – there are many!

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Remember to step back from compliance and along the way identify potential gains the new requirements are providing with new standards, new process and procedures, exclusion of leases not required, lease payments that are not in the contract yet paid without much review for accuracy, and the like. There are many opportunities if you are paying attention. The forest versus the trees comes to mind here.

Look for business value in non-obvious areas: tax savings, push back to leasing companies for price reductions, challenge real estate common area charges (not always spelled out in each lease).

Have someone on the team responsible for continually reviewing the leases and challenge reasons for each.  Keep track of business value ideas in a central place since there will be some great ideas found that can be used across many leases. And learn from other companies that are going through this compliance effort since they may have some great ideas as well.

This can be uncomfortable, especially in decentralized scenarios where a remote Business Unit has the autonomy to make business decisions. In these cases, this team leader can serve more as an advocate for the Business Unit and point out places where business value can be added along the way versus the whistle blower approach.

Read more about other time savings ideas on our Lease Accounting site or give us a call at 913.752.9400.

9.  CFO feedback on the compliance efforts – has been pretty brutal on two fronts:  the cost and the effort required for compliance given the proposed business benefits and questioning why the FASB has gone down this path to begin with.

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Several CFOs and Controllers don’t really understand why the FASB has gone to all these efforts. There is very little business value they can see provided to the investment community in regard to added transparency. Companies are investing in new Lease Accounting software in many cases and devoting resources (both internal and external) to change processes to accommodate the standards.

In our work and discussions with many companies both public and private a few key themes continue to rise to the surface. First, compliance for Revenue Recognition has taken longer and cost more to implement than originally expected. Next, many of the same overburdened resources in the company that helped with implementing Revenue Recognition will now be responsible for implementing Lease Accounting.  This is causing a strain on many company resources since this is all in addition to their ‘day jobs’ like SEC reporting, closing the books, accounting for taxes, running the business and the like.

We all don’t have much we can do other than supporting the compliance requirements as efficiently as possible. The most impactful support includes automating and streamlining the compliance implementation process.

Read more about other time savings ideas on our Lease Accounting site or give us a call at 913.752.9400.

 

 

Rule Change Checklist

   Have you started? Trouble getting started? Hit a wall?

 

Do you know your company-wide number of leases? Do you know where they are located?
Do you know the new FASB financial compliance requirements?
Do you have a company-wide plan to identify all assets, collect all leases and extract all data?
Have you defined your new lease accountability processes? Procurement and lease evaluation?
Have you established a dedicated, centralized resource team? Set capture and operational standards?
Do you have lease capture tools that integrate with your accounting software?
Do you have a financial plan for reporting impact and financial gains or losses?
Do you have a clear understanding of needs to define an RFP and vendor selection process for Lease Management software?
Do you know your non-compliance risk mitigation?
Do you have the knowledge and experience on your staff to support this large effort?


SHAREHOLDER & FINANCIAL IMPACT PLANNING

    Have you planned for the new reporting impact on:

Companies financial performance: EBITA, profits, assets and liabilities.
Company performance measures and executive compensation?
Share price and market capitalizations? Credit ratings? Bank/Loan covenants?
Strategic opportunities to improve financial performance?

 


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