Lease Accelator - NINE THINGS PRIVATE COMPANIES ......The good news is that private companies have an extra year to adopt the standards. And private companies can learn from the mistakes

9 THINGSPRIVATE COMPANIESCAN LEARN FROMPUBLIC COMPANIESTHE NEW LEASE ACCOUNTING STANDARDS

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TABLE OF CONTENTS

02 www.leaseaccelerator.com

OVERVIEW

CONTRACTS

DATA

SYSTEMS

TEAMWORK

TESTING

TRAINING

PROCESS

COSTS

SAVINGS

03

04

05

06

07

08

09

10

11

12

#1

#2

#3

#4

#5

#6

#7

#8

#9


OVERVIEWMost public companies significantly underestimated the complexity associated with implementing the new lease accounting standards. They started late. They did not assign enough resources. And they did not allocate enough budget.

A recent KPMG survey found that the cost of lease accounting projects increased at 62% of companies over the prior 12 months. And almost 1/4 of companies are spending more than $500K on implementation.

The good news is that private companies have an extra year to adopt the standards. And private companies can learn from the mistakes of their peers in public markets by avoiding the key pitfalls that created much of the last-minute chaos around the initial deadlines.

In this guide, we will highlight the nine biggest mistakes that public companies made in underestimating the complexity of the new leasing standard. From finding leases and abstracting data to defining business processes and engaging the business, we will help you to navigate the biggest landmines in your lease accounting journey.


Historically, few organizations have maintained a centralized listing of all the assets they lease — and for good reason. There has never been a good reason to track leases. However, going forward, your auditors may want you to demonstrate the completeness of your lease portfolio, which means you need to identify the full population across your organization. Be prepared to go through a scavenger hunt across the organization searching through vendor invoices, file shares, and contract repositories to identify anything that might be considered a lease.

On average, large companies are taking two to three months to gather a complete inventory of your leases. Some are taking much longer, and there are numerous examples of large public companies still identifying leases they were not aware of several months after adoption.

CONTRACTS#1For most companies, the hardest part of the project is simply figuring out

“what do we lease?”

DATA#2


Once you find all the leases, you then need to abstract the relevant data needed to perform the accounting calculations. In some cases, over one hundred different attributes of a lease may be needed to perform the initial measurement and recognition. Rent payment formulas, frequency, and timing as well as initial direct costs, security deposit amounts, and end-of-lease residual guarantees are just a few examples, and those are just the payment fields! Despite the hype around artificial intelligence, no vendor has cracked the code on automating lease abstraction. Therefore, you need to have a team of contract analysts roll up their sleeves to search through each individual contract for the necessary data.

To further complicate matters, not all of the data required is written in the lease contract. Some information, such as “reasonably certain holding periods,” may not be documented anywhere, and you may need to interview stakeholders to get the information.

SYSTEMS#3


Few companies have historically used an enterprise software application to track their leases. There are traces of lease data scattered across ERP, accounts payable, fixed asset, and procurement systems but no centralized system. Footnote disclosure calculations under ASC 840 typically were handled in spreadsheets, and while many companies have a real estate system, these applications were designed for administering building leases — not accounting for them — so they do not track all the information needed to perform the calculations. As a result, you need to explore purchasing a dedicated lease accounting application with a specialized accounting engine and dedicated subledger.

Most project teams are finding the level of effort required for demos, RFPs, and implementation of these systems to be far longer than expected, as a wide range of stakeholders within the business need to participate from Sourcing to InfoSec.

TEAMWORK#4


Unlike most accounting change projects, lease accounting cannot be successfully managed within the four walls of the controller’s organization. ASC 842 requires participation from a number of headquarters functions as well as the various business units. You need AP to help identify expenses that might be leases. You need procurement to help with analyzing the contract terms. You need treasury to help with estimating IBRs, and you need participation from the business units that manage the assets day-to-day. You need real estate to share “reasonably certain holding periods” for property leases. You need IT to confirm expected residual values for data center assets. You need transportation to confirm the existence and accuracy of data about company cars and trucks.

Most of these teams need to be “sold” on the reasons why they should invest time in an accounting project that serves no obvious benefit to them.


There is very little standardization in leasing contracts. Pricing and contract terms vary greatly across asset categories, geographic regions, and leasing companies. As a result, most companies portfolios have a mix of different payment structures, frequencies, and timings as well as different end-of-term options and guarantees.

Accounting policy elections and reporting requirements vary from company to company as well. As a result, there are many different classification policies, fiscal calendars, and international/statutory requirements that come in to play. If you “do the math,” you will discover that there are over 100 billion different combinations of use cases for lease accounting!

Fortunately, your team only has to contend with a small percentage of these, but even if it is only 1 percent, that would be 1 billion different use cases. How can you be sure your software provider is testing for the combinations that matter to you? How can you be sure that they won’t break things as their code changes? You need a bulletproof regression test plan that ensures you do not end up with unexpected errors at month end.

TESTING#5


There are hundreds of thousands of leasing experts around the world, many of whom have decades of experience in complex tax, legal, and accounting issues with right-of-use assets.

However, 99 percent of these leasing experts work at the banks, leasing companies, and financing companies. Very few experts work in big companies because there has never really been a need to have leasing experts in corporate finance, procurement, or accounting roles, but with the new standards, the workforce of corporate leasing experts needs to grow by hundreds of thousands in just a few years.

You can get by with using consultants during the implementation process, but how will you staff your lease accounting teams for post adoption?

You need a talent development plan that includes recruiting and on-boarding accounting staff into a center of excellence, and each team member will need training in the new systems, processes, and controls for leasing.

TRAINING#6

PROCESS#7


Getting to “Day One” compliance requires companies to overcome many hurdles, but it does not compare to the challenge associated with keeping the accounting accurate on day two and beyond. Each month the business will be signing new leases and negotiating changes to existing contracts, while others come to end of term. To ensure accuracy and completeness, accounting teams need to track these changes to the lease portfolio closely. Few companies are set up to perform the reporting that is necessary. Unlike fixed assets, payables, receivables, and other balance sheet line items, leasing has not been an area with clearly defined business processes at most organizations.

Project teams need to understand that they are not only establishing a new record-to-report lifecycle, but they also need to establish business processes for lease management throughout the lifecycle, and that is a much broader scope than most accounting projects typically entail.

COSTS#8


For all the reasons previously described, the costs of most lease accounting projects have considerably exceeded the original budget estimates. A recent KPMG survey found that the cost of lease accounting projects increased at 62 percent of companies over the prior 12 months, and almost a quarter of companies are spending more than $500K on implementation. Many companies have underbudgeted for technology spend, quickly realizing that the traditional spreadsheet-driven “row faster” approach is not going to suffice for leasing. Staffing is often underestimated as well. A significant work effort is required to collect leasing data, redesign business processes, and implement new systems. If you are like most companies, you do not have extra people sitting around idly waiting for a new project.

As a result, you may need to tap into some outside consultants to perform the “heavy lifting” associated with tasks such as abstracting lease data and testing accounting calculations. There are plenty of ways to cut costs, but many of the shortcuts can backfire post adoption and end up costing you more money.

SAVINGS#9


Once all of your leasing data is in a centralized repository, it becomes much easier to identify opportunities for savings. With centralized reporting, you can benchmark the rates and contract terms you are obtaining for leases across business units, geographies, and asset categories. Centralizing data also makes it much easier to identify areas of wasteful spend and leakage. For example, some companies are paying rent on office space they vacated months ago or paying for equipment they returned years ago. Centralizing leasing data enables you to make smarter decisions about end-of-term options by ensuring you do not miss deadlines to renew leases at favorable terms.

Many companies are spending millions of dollars each year on equipment leases that rolled over into month-to-month “evergreen” status. These assets could be replaced with newer equipment with better performance, capacity, and safety features. While savings may not be the mission of the financial reporting group, you will be a hero with procurement, treasury, FP&A when you help to shine a light on the potential opportunites.

ABOUT LEASEACCELERATOR:

LeaseAccelerator offers the market-leading Software-as-a-Service (SaaS) solution for Enterprise Lease Accounting, enabling compliance with the current and new FASB and IFRS standards. Using LeaseAccelerator’s proprietary Global Lease Accounting Engine, customers can apply the new standards to all types of leases including Real Estate, fleet, IT, and other equipment at an asset-level as required by FASB and IASB. On average, LeaseAccelerator’s Sourcing and Management applications generate savings of 17 percent with

smarter procurement and end-of-term management. Learn more athttp://www.leaseaccelerator.com/


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Lease Accelator - NINE THINGS PRIVATE COMPANIES ......The good news is that private companies have an extra year to adopt the standards. And private companies can learn from the mistakes