Five Keys to Success with Your Lease Accounting Project 84200 · FIVE KEYS TO SUCCESS WITH YOUR LEASE ACCOUNTING PROJECT Historically, leasing has been treated merely as an accounts

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FIVE KEYS TO SUCCESS WITH YOUR LEASE ACCOUNTING PROJECT

WITH YOUR LEASE ACCOUNTING

PROJECT

FIVE KEYS TO SUCCESS



Historically, leasing has been treated merely as an accounts payable item by most organizations. Few companies have established mature business processes to support leasing. Where business processes do exist, they likely vary by geography and asset type. At many companies, leasing will need to undergo an enterprise-wide process transformation to ensure the accuracy of financial reporting required by the standard. You will need to redesign processes, policies, and controls to support the new standard, then communicate, train, and enforce the new model across the enterprise. As a result, the leasing standard is not a project that can be contained within the four walls of the controller’s organization. It requires a truly cross-functional effort.

Leasing touches almost every part of the business. Accounts Payable manages disbursements for leased assets and collections and performs billing for subleases. Procurement and Legal negotiate the contracts. Treasury and Tax manage aspects such as insurance and property taxes. The leased assets might be used by almost every organization in the company from Corporate IT and Real Estate to Logistics and Operations. Even those groups, such as Human Resources and Investor Relations, that do not rely on leases may be impacted by the changes to the accounting rules. Executive compensation plans may be tied to metrics impacted by transferring operating leases on-balance sheet. You will need to proactively communicate the potential impacts to financial statements with shareholders and investors.

Success will require establishing a cross-functional team of representatives from all of the functions above. Establish a core team of project members that include functions such as Financial Reporting, Technical Accounting, Procurement, and Corporate IT. Seek out an executive sponsor (or steering committee) that can help overcome obstacles as they arise, such as budget, resources, or cooperation, from various business units.

BUILD A CROSS-FUNCTIONAL PROJECT TEAM

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As you review the technical standards issued by FASB and IASB, it will be important to quickly pinpoint the top two or three issues that will impact your organization. Two aspects of the standard that are frequently raised as key challenges by implementation teams are the expanded definition of a lease and the need for asset-level accounting.

Under the new standards, contracts which a lawyer or banker may not consider a lease will be treated as such for accounting purposes under FASB and IASB’s new definition. Embedded leases are consistently reported to be one of the more challenging aspects of the new standard by companies that have already adopted the new standards. Success will require close collaboration with the procurement organization to identify contracts that may fall within that scope. Unfortunately, the process is a highly manual exercise as no artificial intelligence technologies have been introduced that can automatically evaluate whether a contract contains an embedded lease.

Equipment leases introduce a number of challenges which will require early, strategic decisions from project teams. For example, it is common for equipment leases to have multiple assets on a single lease schedule. Individual assets on the same lease may be utilized by different organizations and therefore need to be allocated to different cost centers. This type of responsibility center accounting will be important for budgeting and segment reporting on disclosures. Perhaps even more challenging will be handling the accounting of partial events at the end of term. At the end of a lease, your business users may want to renew the lease for some of the assets, while others may be returned or bought out. The accounting for these types of partial events can quickly get messy without the right level of automation.

PINPOINT THE ISSUES WITH THE TECHNICAL ACCOUNTING

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The hardest part of the project will probably not be applying the accounting standards, but collecting the data. You will need to gather over 100 pieces of data about each lease to perform the accounting. You will be able to leverage your existing systems and spreadsheets as a starting point, but don’t be surprised if leasing data in the systems of record, such as real estate administration, are incomplete or out-of-date. Most companies will need to go on a scavenger hunt to find the missing data. Some of the information will need to be abstracted from the original lease documents. Other details, such as reasonably certain holding periods for buildings and planned end-of-lease options, are unlikely to be documented anywhere. You will need to interview the users of the leased assets to capture their plans.

Due to the extensive time required for data collection, this is not a process that you will not want to repeat. Therefore, you will want to validate that you are collecting the complete list of data from the most accurate and up-to-date sources before you begin. One common mistake is working off an older version of the lease. Before abstracting data, validate that you have the latest version of the lease contract with the most recent schedules and amendments. Otherwise, you might be making judgments on an outdated set of payments, terms, and lease clauses. Cross-verify and reconcile the information you have in different systems to ensure your data is accurate and up-to-date. For example, confirm that the disbursements being made through Accounts Payable match the expected rent payments from the lease.

Leasing contracts are complex. Don’t assume that you can hire a group of college interns to abstract data from leases and populate your systems. You will need experienced analysts familiar with reviewing contracts. Consider leveraging outside consultants to augment your staff. The advisory practice of a Big Four firm or other consulting firm is a good place to look.

COLLECTING THE DATA WILL BE THE HARDEST PART

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Many of the applications on the lease accounting software market are relatively immature, and some still struggle with reporting and accounting. Many of the products that have been formally released by vendors were rushed through testing cycles with minimal quality control. As a result, you will need to be much more diligent when selecting a vendor than you might with other, more mature categories of software.

Vendor sales teams have become adept at delivering scripted demos that create the impression that the software is fully functional. Be sure to make the vendor perform a live demonstration of your specific use cases with real world lease data. Ask to speak with reference customers who are live in production with the software. Check with advisors at the Big Four firms or with peers at public companies to get back-channel intelligence on the obstacles being encountered in real world implementation projects.

Beware of the hidden costs that vendors do not present. A low cost application may sound appealing because you don’t have to ask your boss for more budget. However, there is usually a reason for the low price. In many of these applications, complex lease structures and business processes are not automated. The result is a lot of manual workarounds. Consider not only the cost of the software, but the total cost of ownership for your lease accounting program, including the number of full time equivalents you will need to hire to manually process all the exception scenarios.

CHOOSE YOUR SOFTWARE PACKAGE CAREFULLY

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Most private companies are mainly focused on achieving day one compliance with the new standards. However, few companies have given significant consideration to how they will manage the process of keeping their leasing data accurate on day two and beyond.

Performing the accounting on an on-going basis will require processes that keep the leasing data accurate, complete, and up-to-date. How will you get visibility into the hundreds (or thousands) of new leases being signed by various business units across the world? How will you keep track of thousands of equipment lease end dates, as well as the associated decisions to renew, return, or buy out the assets? The changes do not just occur at the start or end of the lease, but in the middle of the lease as well. Individual assets on equipment leases might be partially bought out or returned. Variable rents tied to market indices or sales performance might change.

To satisfy the concerns of external auditors, you will need to establish policies and controls for lease management. What documentation needs to be kept on file for each lease? Will the master lease agreement, purchase order, and invoice be sufficient or will you also need copies of lease versus buy and lease classification analyses? How can you ensure that your lease accounting policies are being consistently applied and documented when overrides occur? How can you confirm at the period end that all lease contracts and individual leased assets are properly accounted for?

Best-in-class project teams will not wait until after the implementation deadline to start working on these issues. They will tackle the development of processes, policies, and controls during the project implementation process. Early attention to these day two operational issues will reap cost savings after the deadlines.

SETUP A MODEL FOR DAY TWO AND BEYOND

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Five Keys to Success with Your Lease Accounting Project 84200 · FIVE KEYS TO SUCCESS WITH YOUR LEASE ACCOUNTING PROJECT Historically, leasing has been treated merely as an accounts

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