How to Get Started with Your Lease Accounting Project. A Finance Executive s Guide to the First 90 Days

Transcription

1 How to Get Started with Your Lease Accounting Project A Finance Executive s Guide to the First 90 Days

2 How to Get Started with Your Lease Accounting Project 2 PURPOSE OF THIS GUIDE This guide is intended to help CFOs, Chief Accounting Officers, Controllers and other financial executives devise a strategy for implementing the new lease accounting standards. In this guide we will help you navigate the first 90 days of your project. Destination First, we will help you to assess the situation by answering questions such as: What are the top issues and risks? What do we lease today? What policies, controls and systems exist? What is the current accounting process? Then we will turn to towards getting the project started by helping you to answer questions such as: Who should be on the project team? How long will the project take? How much will the project cost? After completing the six-phases outlined in this guide, you should be in a position to secure budget and get started with the implementation of the new standards. Origin Note: This guide is not intended to provide a technical accounting overview of FASB and IFRS standards. Instead, the focus of this guide is how to implement the standards. However, we will discuss a few of the issues with the standards that most impact the implementation process.

3 How to Get Started with Your Lease Accounting Project 3 ROADMAP: THE FIRST 90 DAYS 1) Understand the New Rules Understand the new lease accounting standards. What are the risks to your business? 1 2 2) Situational Assessment Conduct a readiness assessment. Understand the implementation challenges and risks. 3) Staff the Project Team 3 4) Evaluate Your Leasing Program Identify an executive sponsor and project manager. Assign a crossfunctional team. 4 Assess the maturity of your current leasing program. What systems, processes, controls are in place? 6) Define Budget & Timeframes What budget will be needed for lease accounting software? How much will it cost for outside consultants to help you implement? 6 5 5) Define Project Scope & Strategy Will this be a strategic or tactical project? Will you model your leasing program to be best-inclass or just to comply?

4 PHASE 1 UNDERSTAND THE NEW RULES

5 How to Get Started with Your Lease Accounting Project 5 LEASES MOVE ON TO THE BALANCE SHEET The end goal of the new lease accounting standards is to provide investors with more transparency around your leasing contracts. Operating leases, which have historically been offbalance sheet will now be treated as assets and liabilities on the balance sheet under both US GAAP and IFRS. Operating leases represent the majority of leases for 93% of companies. 1 The challenges with these new standards should not be underestimated. In fact, some have called the new leasing standards the biggest accounting change ever. The International Accounting Standards Board estimates that over $2 Trillion in liabilities will move onto corporate balance sheets during this transition. While most of the dollar value of these leases is associated with real estate, many companies will have a larger number of leases for non-real estate assets such as vehicles, IT and equipment. Assets IAS 17 (Current) Property, Plant & Equipment IFRS 16 (New) 44,521 44,521 Lease Assets ,757 Other 26,703 26,703 Total non-current assets 72,182 89,981 Total assets 110, ,067 Borrowings 22,533 22,533 Lease liabilities ,233 Other liabilities 57,714 57,264 Total liabilities 80, ,030 Equity 29,324 27,037 Total liabilities and equity Example Balance Sheet 110, Source: International Accounting Standards Board: IFRS 16 Effects Analysis (January 2016) 1) KPMG The Great Accounting Challenge (May 2016)

6 How to Get Started with Your Lease Accounting Project 6 THE BIG PICTURE - ISSUES AND RISKS Impact on Financial Reporting : For many Fortune 500 companies, several hundred million (if not a few billion dollars) worth of leases will transition onto your balance sheets as a result of the new lease accounting rules. CFOs need to consider: What will be the impact to your market capitalization and share price? How will you communicate these changes to investors? Will the changes to your balance sheet impact existing debt covenants and borrowing ability? How will ratings agencies respond? How will financial metrics such as EBITDA and Return on Assets be impacted? Are changes needed to executive compensation and performance plans? Administrative Reporting Burden How much effort will be required to comply with the new accounting rules? Is this another Sarbanes-Oxley-like burden that will create massive administrative burdens for the accounting departments of big companies? Or will it just be a few months worth of work for the accountants and IT department?

7 How to Get Started with Your Lease Accounting Project 7 IMPLEMENTATION TIME FRAME The SEC has defined implementation deadlines for the new lease accounting standards which vary based upon your fiscal year and the private/public nature of your ownership. The earliest implementation deadlines for December 31 st filers are for public companies with a fiscal year of Deadlines for private companies are one year later. However, the official deadlines are a bit misleading. The SEC is also requiring comparative reporting three years of income statements and two years for balance sheets. As a result, you likely need to start tracking more data about operating leases well in advance of the official deadline. For some companies, as early as, January To implement the new standards you will need to: 1) Take an inventory of all your leases 2) Gather key data about each lease 3) Apply the new accounting standards 4) Upload the data into a lease accounting sub-ledger 5) Generate the new journal entries 6) Produce updated balance sheet and income statements

8 How to Get Started with Your Lease Accounting Project 8 KNOW YOUR IMPLEMENTATION DEADLINES Current Standards FASB ASC 840 (US GAAP) and IAS 17 (IFRS) Preparation & Transition Plan and Implement New Standards Comparative Reporting Period Income Statement Balance Sheet New Standards FASB ASC 842 & IFRS 16 Example December 31 Fiscal Year December 31, 2019

9 How to Get Started with Your Lease Accounting Project 9 THE BIG OPERATIONAL IMPACTS On Balance Sheet As mentioned earlier, operating leases will now move onto the balance sheet. Both US GAAP and IFRS will require new lines on the balance sheet to report on Right-of-Use assets and liabilities. With the additional visibility provided to leases, the level of scrutiny from auditors will increase. Expect to spend more time with auditors testing the completeness and the accuracy of the leasing figures. Asset-Level Tracking Since leases will be reported on the balance sheet as assets, you will need to track all lease data at an asset-level. While most real estate leases have one asset per schedule, this is not the case for equipment leases. Most companies track lease data only at a schedule-level under the current lease accounting standards. Gathering asset-level data will be one of the biggest challenges. Embedded Leases The new lease accounting standards consider some outsourcing and service contracts to have embedded leases as well. In other words, contracts that a lawyer or a banker might not call a lease, could be deemed leases by accountants if they meet certain criteria. And even if 80% of these service contracts prove not to meet the definition of a lease, you will still have to collect the contracts and perform the analysis.

10 How to Get Started with Your Lease Accounting Project 10 1) Understand the New Rules 2) Situational Assessment 3) Staff the Project Team PHASE 1 SUMMARY ü Operating leases move on to the balance sheet, which could impact various financial metrics, debt covenants and even executive compensation plans at some firms. ü The implementation deadlines start in December 2019 for public companies. However, three years of comparative reporting will be required for income statements. ü The biggest changes are the need to track leases at an asset level and the need to account for embedded leases. 4) Evaluate Your Leasing Program 5) Define Project Scope & Strategy 6) Define Budget & Timeframes LEARN MORE Learn more about the technical standards by reviewing one of the guides available from the standards boards or Big Four firms: FASB Standards Documentation IFRS Standards Documentation EY Lease Accounting Guide PWC Lease Accounting Guide Deloitte Lease Accounting Guide KPMG Lease Accounting Guide

11 PHASE 2 SITUATIONAL ASSESSMENT

12 How to Get Started with Your Lease Accounting Project 12 BEFORE YOU MAKE YOUR FIRST MOVE Assess the Situation Many executives will make the mistake of jumping into the lease accounting project without really understanding the key challenges. It is tempting to rush out to purchase a lease accounting package for $50,000 then starting to upload the data. But there is more than meets the eye with these new standards. Look Before You Leap We How encourage many leases you do to we start have? by asking tough questions What percentage up front. are Understand real estate versus the hidden equipment complexities (IT, fleet, etc.)? with the new accounting standards. Who owns non-real And understand estate leases? what are expected to Where be the is leasing top implementation data stored? challenges with collecting When was the data. last time Performing leasing was diligence audited? up front Do we will track mitigate leases your at an risk asset-level? of project delays and compliance What is your issues. confidence level in the leasing data?

13 How to Get Started with Your Lease Accounting Project LOOK BENEATH THE SURFACE Financial Metrics Financial ratios (EBITDA, ROA) impacted by move of leases onto the balance sheet as assets and liabilities Credit Impact Credit Ratings, Existing Debt Covenants, Future Borrowing Abilities Asset-Level Tracking Current lease administration systems do not track at asset-level. Data needed for accounting not captured in any system. Embedded Service Contracts Outsourcing agreements and other services contracts may now be considered leases for accounting purposes Talent Scarcity Relatively few experts on leasing in the market. As the deadline approaches it will be challenging to find talent. IT, Fleet, Equipment No one owns equipment leases. Weak processes, controls and systems. There will be a significant effort required to collect data. Comparative Reporting Three years for Income Statement. Two years for Balance Sheet. Real deadline for tracking lease data is only months away

14 How to Get Started with Your Lease Accounting Project 14 THE MOST COMMON MISTAKES Ignoring Non-Real Estate Although the dollar value of equipment leases might be lower than real estate, the number of lease contracts is typically higher. The data for these leases will be much harder to collect. At most companies there is no centralized group that owns these leases nor is there is an enterprise application to track them. Companies who put off data collection efforts for equipment until the eleventh hour of the project will find themselves behind the proverbial eight ball scrambling to gather at the last minute. SOX and Post Implementation Although the priority for most companies will be complying with the initial deadline, a far greater challenge exists with the on-going reporting. Success requires that you not only collect all the data necessary to perform accounting on Day One, but that you develop a repeatable process to consistently maintain accurate, complete records in perpetuity. You will need to automate processes for tracking midterm and end-of-term changes to leases. And you will need to have systems, policies and controls in place that will stand up to the scrutiny of a SOX audit.

15 How to Get Started with Your Lease Accounting Project 15 CONDUCT A QUICK ASSESSMENT Who owns the leasing program? Ownership Where is leasing data stored? Systems When was the last time lease accounting was audited? Accuracy How many leases do we have? Data Visibility Assessing the Maturity of Your Leasing Program Ask these questions to key stakeholders. Then ask them what their confidence level in the answers is? Would they sign their name to the numbers provided? Do we track leases at an asset-level? The responses you get will provide you with a sense of the maturity of your leasing program and the scope of the challenge ahead.

16 How to Get Started with Your Lease Accounting Project 16 1) Understand the New Rules 2) Situational Assessment 3) Staff the Project Team 4) Evaluate Your Leasing Program 5) Define Project Scope & Strategy 6) Define Budget & Timeframes PHASE 2 SUMMARY ü Before rushing into the implementation of the project, take a few weeks to gain situational awareness about leasing at your company. ü Look beneath the surface to identify the true challenges with the new standards. For most companies the heavy lifting will not be the accounting, but gathering the data and putting the necessary controls and processes in place. ü Avoid the most common implementation mistakes. Get your arms around equipment leases early in the process. Think beyond the initial deadline by designing repeatable business processes to ensure lease accounting is performed accurately. ADDITIONAL ACTIONS TO CONSIDER Consider getting an executive briefing on the new lease accounting standards from a trusted advisor. The Big Four and various software firms have developed significant expertise in the new standards during the development process. Find out if a financial audit or SOX audit has been performed on your lease accounting recently. And if so, what were the issues?

17 PHASE 3 STAFFING THE PROJECT TEAM

18 How to Get Started with Your Lease Accounting Project 18 PROJECT OWNERSHIP The Executive Sponsor Perhaps, the most critical role in the project will be that of the executive sponsor. At most companies the Controller or Chief Accounting Officer is the likely candidate. However, the CFO adds even more weight to the project if his/her time can be secured. The executive sponsor s role is not to manage the day-to-day aspects of the project, but to act as the advocate for the project, championing and communicating the rationale for a lease accounting initiative to the various stakeholders in the business. Initially, the sponsor will help to secure budget and resources. Throughout the project the sponsor will help to clear obstacles that put milestones or project goals at risk. The Project Manager The project manager will work in concert with the executive sponsor, but at a more tactical level. The project manager will host recurring meetings; issue weekly status reports and monitor project risks. S/he will develop the initial implementation plan; on-board new project members; and prepare for quarterly executive meetings. For a lease accounting project, you will want someone who has prior experience with a global, cross-functional initiative as well as prior knowledge of finance and accounting.

19 How to Get Started with Your Lease Accounting Project 19 THE KEY STAKEHOLDERS IT s Fleet Treasury Corporate Tax Procurement Real Estate Accounting

20 How to Get Started with Your Lease Accounting Project 20 APPOINT A CROSS- FUNCTIONAL TEAM Many groups in your company will touch a lease during its lifecycle. As a result, you will need to assemble a cross-functional team to participate in the project. Plan to include: Technical Accounting Will play a critical role in lease accounting software selection, policy strategy, identification and assessment of controls for the new standards. Corporate Real Estate The definitive source for property lease terms, payments and future plans. Understands complex sublease or sale-leaseback arrangements that exist. Procurement Responsible for negotiating the pricing and business terms for all new leases, extensions and end of term buyouts/purchases. Treasury Typically owns the financial strategy and policies for leasing to ensure company is making optimal use of its cash. IT Needed to scope upgrades of existing systems and define requirements for purchases of new lease accounting software. Financial Reporting The most impacted by the new standard as they are accountable for meeting the SEC deadlines for implementation. Corporate Tax Will need to evaluate the impacts of new accounting standards to sales, property, and income taxes. Depending upon the types of assets you lease, you may also want to include your Logistics, Fleet and Operations teams.

21 How to Get Started with Your Lease Accounting Project 21 1) Understand the New Rules 2) Situational Assessment 3) Staff the Project Team 4) Evaluate Your Leasing Program 5) Define Project Scope & Strategy 6) Define Budget & Timeframes PHASE 3 SUMMARY ü Identify an executive sponsor who will function as a champion for the lease accounting project across the business, clearing obstacles that pose a risk to the schedule or budget. ü Appoint a strong project manager, to own the tactical day-to-day execution of the lease accounting effort. Experience in financial or accounting projects is a must. ü Nominate representatives from key stakeholder groups to participate in the project. Include back office teams such as procurement, treasury and accounting as well as the owners of leased assets such as real estate, IT, fleet and operations. ADDITIONAL ACTIONS TO CONSIDER Identify external business partners that will be critical to the project success. These might include real estate brokers and equipment lessors who are closely involved in the day-to-day operations of your leasing program. Consider outsourcing the project management aspect of the initiative to a consulting organization with specialized leasing expertise.

22 PHASE 4 ASSESS YOUR CURRENT LEASING PROGRAM

23 How to Get Started with Your Lease Accounting Project 23 BUSINESS PROCESS ASSESSMENT A critical first step in your journey towards compliance is to understand the maturity of your existing leasing program today. You will need to get all the experts in the room. Some questions to consider include: How does the current accounting process for capital leases work? Who provides the data that goes into the notes disclosure for your 10-K today? Which of your internal systems store data about leases? How is it kept current and accurate throughout the lifecycle of a lease? What are the weakest links in the reporting? What policies and controls are in place? Are they enforced? How would leasing perform in a SOX compliance audit? What external entities are involved in the leasing process? Do you use real estate brokers in some regions? Do you use fullservice equipment leasing companies? Unfortunately, there are no public benchmark studies to compare the maturity of your leasing program to those who are best in class. However, at most organization s leasing programs have been neglected, with insufficient funding, resources and oversight. As a result, we believe it will become obvious where the issues are. Additional questions about processes, systems and controls are offered on the next page.

24 How to Get Started with Your Lease Accounting Project 24 ASSESS SYSTEMS, PROCESSES & CONTROLS ACCOUNTING What controls, processes and systems are in place for current notes disclosure process? DATA QUALITY Is data in digital format? Or stored in file cabinets? Spreadsheets? Lessor systems? OWNERSHIP Do you have a centralized real estate group? Who owns the success of your IT, fleet and other equipment leasing programs? SYSTEMS Do you have a real estate Lease Administration System? Are leases tracked in Asset Management Systems? CONTROLS Who can initiate a lease? What approvals are required? When is a lease-vsbuy analysis conducted? PROCESSES How do business processes vary by geographic region? By the type of asset being leased? How are non-real estate assets tracked?

25 How to Get Started with Your Lease Accounting Project 25 TAKING A LEASE CENSUS A key aspect of assessing your current leasing program is to identify what is being leased. We recommend consulting five different organizations to gather a master list of all your leases: 1) Procurement- Every lease has a contract that is negotiated by procurement, legal counsel and the relevant Subject Matter Experts. These groups should have records on what is being leased. 2) Lessors - There is a leasing company or landlord on the other end of every contract. These lessors definitely know what you are leasing, because they bill you for it on a regular basis. 3) Asset Owners - Various groups in the organization are accountable for managing your leased assets. This might be IT for laptops and data center gear; corporate real estate for buildings and warehouses; or logistics teams for forklifts and trucks. These asset owners should have a handle on what is being leased. 4) Financial Reporting - Financial reporting ensures that leased assets are properly accounted for under the current accounting rules. As a result they should have records on both capital and operating leases to support the current disclosures. 5) Accounts Payable A/P is responsible for ensuring that the invoices for leases are paid monthly. As a result, the A/P department should know what recurring payments are being made that could be leases.

26 How to Get Started with Your Lease Accounting Project 26 WHAT DO YOU LEASE? Real Estate IT & Data Center Office Furniture Vehicle Fleet Medical Equipment Material Handling Retail Store Equipment Aircraft Manufacturing Equipment

27 How to Get Started with Your Lease Accounting Project 27 1) Understand the New Rules 2) Situational Assessment 3) Staff the Project Team 4) Evaluate Your Leasing Program 5) Define Project Scope & Strategy 6) Define Budget & Timeframes PHASE 4 SUMMARY ü Get the key stakeholders in a room to conduct a business process assessment of your current leasing program. Evaluate the maturity of the existing processes, systems and controls. ü Identify the weak spots in your current leasing program. In many cases the weaknesses maybe isolated to certain geographic regions or asset types. For example, equipment leasing in Asia- Pacific is not well managed. ü Conduct a census of your current leasing portfolio. Talk to procurement, accounting, finance, asset owners and lessors to understand what types of real estate and equipment leases exist around the world. ADDITIONAL ACTIONS TO CONSIDER Review a sampling of 20 leases. Select a diverse mix of international and US leases for both real estate and various types of equipment. Evaluate the quality of the data in your systems and the accuracy of your accounting. Conduct a leasing maturity assessment with a consultant or software vendor. Compare your processes, systems and controls to the best practices used by recognized leaders in corporate leasing programs.

28 PHASE 5 DEFINE PROJECT SCOPE AND STRATEGY

29 How to Get Started with Your Lease Accounting Project 29 Strategic vs Tactical Approaches The cross-functional team should review the results of the Business Process Assessment with the executive sponsor to recommend how to approach the lease accounting project. Most companies will choose from three options: Plan A (Comply) - Our leasing program is relatively mature. We need to implement the additional systems, processes and controls needed for compliance. Plan B (Control) - Our leasing program is poorly executed. The way we manage systems, processes and controls would not survive a SOX compliance audit. We need to enhance our program while complying with the new standards. Plan C (Transform) We want to do more than just comply. A significant savings opportunity could be realized by overhauling the program at the same time we redesign systems, processes and controls for the new standards. DEFINE YOUR PROJECT STRATEGY It may turn out that the answer is different by asset type. For example, your real estate leasing program may be quite mature, while the IT, fleet and equipment leasing programs are in dire need of attention. In that case you may want to split the project into multiple sub-projects, each focused on different asset types.

30 How to Get Started with Your Lease Accounting Project 30 ASSESS YOUR REAL ESTATE LEASING PROGRAM Some companies are using the new accounting rules as a reason to re-evaluate their real estate leasing program. Ask your team the following questions to assess the potential impacts of a more effectively managed real estate leasing program. Capacity - How quickly are you able to identify and act-on excess capacity? Are there underutilized facilities that could be subleased, consolidated or disposed of? Over-Billing - Are you able to identify overcharges on monthly invoices then seek reimbursement from the landlord? What percentage of your invoices are incorrect? Are you paying late fees? Start Dates - Are you over-paying rent by using the wrong start date? Are you using the contract signature date or the commencement date? Notifications Are you missing out on cost savings opportunities to expand by failing to notify lessors of your plans? Funds Recovery Are you recovering security deposits owed to you at the end of a lease term? Are you consistently collecting rent from sub-lease tenants? There may be an opportunity for you to save millions of dollars per year, by not only solving your lease accounting problem, but by enabling better real estate lease administration as well.

31 How to Get Started with Your Lease Accounting Project 31 ASSESS YOUR IT, FLEET & EQUIPMENT LEASING Another set of companies are using the new lease accounting standards as a catalyst for fixing their equipment leasing programs. At many companies, IT, fleet and equipment leasing programs have lacked proper ownership, processes and systems. Ask yourself the following questions to assess the potential financial impacts from a new strategy: Lease vs Buy - Are you conducting lease versus buy analysis for these types of leases? Are decision makers using the latest market rates and financial variables? Are the appropriate controls in place to ensure you are making the best economic decisions? End of Term - Are you realizing the savings expected from your leasing program? Are you returning equipment for leases at end of term? How much money is being lost to evergreen fees? Competitive Sourcing - Are you getting the most competitive financing and contract terms from your leases? How much could you save by leveraging a competitive bidding process when sourcing new leases? There may be an opportunity for you to save millions of dollars per year, by not only solving your lease accounting problem, but by enabling better equipment lease administration as well.

32 How to Get Started with Your Lease Accounting Project 32 Compliance Our primary goal is to comply with the new lease accounting standards. We need to focus primarily on the accounting process. DEFINE YOUR PROJECT STRATEGY & SCOPE Control or Transform Our goal is to attack the root causes of inefficiency in our leasing program. We need to focus on both the accounting and administration of leases.

33 How to Get Started with Your Lease Accounting Project 33 DESIGNING THE FUTURE STATE With a strong understanding of your current program and a project strategy in place, the next step is to design your business processes and information systems for the future. Questions to consider include: Who owns your leasing program for non-real estate assets? Should IT, Fleet and other equipment leases be unified with a common owner? Should there be common business processes? How are mid-term changes being tracked (e.g. sub-lease, early termination, equipment lost/stolen)? What is the notification process? How will the data necessary to perform the proper re-measurement be captured? How will you track leases at an asset-level? Can your systems track if two out of five assets on a lease are terminated at the end of a lease and the other three pieces are renewed under different terms? Is leasing data being manually captured and keyed in for each contract? Is there an automated way to abstract lease data from contracts or receive it digitally from lessors? Document your future state and then identify gaps with the current processes. The gaps should form the basis for new policies, controls and business processes that need to be implemented. The future state should also provide the key requirements for a lease accounting software application.

34 How to Get Started with Your Lease Accounting Project 34 HOW IT SHOULD WORK (BEST PRACTICES) Lease vs Buy Lease versus buy analysis should be conducted using up-to-date financial variables. Leases exceeding a dollar threshold require C-Level approval. Booking Ensure proper classification of leases based upon the new rules for terms, payments, classifications, etc. Disclosures Eliminate the daisy chain of spreadsheets. Software should be able to produce all your debits and credits in minutes. Lease vs Buy Booking Disclosures Mid-Term Events End-of- Term Invoicing Mid-Term Events Changes may trigger remeasurement events. All location changes; contract additions; early terminations; and buyouts should be tracked. End-of-Term Lessors and accounting should be notified by contractual deadline of intent to renew or terminate lease (or purchase the asset). Invoicing Invoices should be compared to expected charges based upon contractual terms. Overcharges should be identified followed by request for reimbursement.

35 How to Get Started with Your Lease Accounting Project 35 1) Understand the New Rules 2) Situational Assessment 3) Staff the Project Team 4) Evaluate Your Leasing Program 5) Define Project Scope & Strategy 6) Define Budget & Timeframes PHASE 5 SUMMARY ü Classify your project into one of three categories based upon your current state of readiness. Should your focus be simply on complying with the new lease accounting standards? Or is there is a need to apply more governance to the business processes for leasing? ü Evaluate your real estate leasing program. How much could be saved by reducing over-billing; managing notifications and better collections and funds recovery? ü Evaluate your equipment leasing program. How much could be saved through better lease versus buy decisions; proactive end of term management and competitive sourcing of financing? ADDITIONAL ACTIONS TO CONSIDER Conduct a Return on Investment assessment to understand the amount of savings that could be realized by better managing your real estate and/or equipment leasing programs. Speak to an outsourcing firm about assuming responsibility for the day-to-day activities associated with your real estate and/or equipment leasing program. This might lead to a faster ROI.

36 PHASE 6 PROJECT STAFFING, BUDGET AND TIMEFRAMES

37 How to Get Started with Your Lease Accounting Project 37 HOW LONG WILL IT TAKE? The length of time it will take you to complete your lease accounting project depends upon a number of factors: Complexity of Lease Portfolio Project Length Current Lease Accounting 1) Perhaps, the most important factor influencing your timeline is the complexity of your leasing program: How many leases do you have? More than 1,000? How big is your lease portfolio? More than $100M? How long have you been leasing? More than 3 years? How many lessors do you work with? More than 20? How many countries do you lease in? More than 10? 2) The maturity of your current lease accounting is also a key factor impacting the timeline: How long does it take you to collect operating lease data for the current FASB accounting standards? Is your data stored in electronic format or paper? Availability of Key Resources 3) As with any project, the schedule will be heavily influenced by how busy the key stakeholders are: Do you have a large Rev Rec project underway? Are you planning major ERP upgrades? Shorter projects with less complex leasing portfolios and more mature accounting processes will take 6-12 months on average. Longer projects with more complex leasing portfolios and less mature accounting process will have a month implementation timeframe.

38 How to Get Started with Your Lease Accounting Project 38 THE KEY BUDGET ELEMENTS There are four key elements of the lease accounting project that you will need to budget for: Financial Impact Analysis You will need to invest time to understand the overall financial impact of the new accounting standards. Budget time to assess the impact to your credit and debt covenants. Your investor relations team will also need to educate shareholders on the impact. And you may need to re-evaluate your lease versus buy strategy. Accounting and Tax Transition You will need to budget time to analyze each lease to classify it; identify key terms; then perform the initial recognition and measurement as well as the subsequent accounting. You will also need to identify and assess impacts to sales, property and income taxes across states and countries. Lease Accounting Software You will need to budget for software licenses (or subscription) and maintenance fees, as well as costs for the associated server hardware, storage and database licenses. Data Collection and Implementation Once you select the software you will need to install and customize it; aggregate and upload the data; integrate and test with other systems; communicate and train users on the application.

39 How to Get Started with Your Lease Accounting Project 39 ESTIMATING THE OVERALL BUDGET Estimating the overall budget for a lease accounting project is challenging, because there are more data points from real-world implementations. Nonetheless, we will offer some potential strategies to arrive at a ballpark estimate for budgeting purposes. Option 1) Percentage of the Portfolio One Top Down strategy is to estimate the cost of the project as a percentage of the value of your leasing portfolio. If your overall leasing portfolio is $500M or less then plan to spend 1% on your lease accounting project. If your portfolio is between $500M and $1B plant to spend 0.75%. If your portfolio is greater than $1B plan to spend 0.5%. Option 2) Use Similar Projects Another strategy is to use a similar project as benchmark for what lease accounting might cost. For example, the new revenue recognition rules might be a good comparison. A recent KPMG study found that 34% of companies plan to spend more than $1M on Rev Rec projects. 1 Option 3) Budget the Components A third Bottom Up strategy is to budget the individual components of the lease accounting project separately. While more effort will be required, this will likely result in a more accurate estimate. See the next page for a methodology. 1) KPMG The Great Accounting Challenge (May 2016)

40 How to Get Started with Your Lease Accounting Project 40 ESTIMATING THE BUDGET COMPONENTS Financial Impact Analysis For most companies, there will be no incremental costs associated with the financial impact analysis. The activities can be conducted with the existing treasury, finance and investor relations staff. Accounting and Tax Transition A simple method to estimate the cost is to assume a certain number of hours per lease. You can arrive at an estimate by reviewing a sample set of leases to discover the average time. Alternatively, you can use industry benchmarks. For example, a recent EY study found that 2/3 of companies expect to spend 1-3 hours per lease on accounting. 2 Lease Accounting Software We suggest that companies plan to spend $100K-$250K per year in subscription fees for lease accounting software. If you are also upgrading your lease administration software plan to spend another $100K to $1M per year. 2) EY/FERF Study - Paving a path to success: preparing for new lease accounting standards (June 2016) Data Collection and Implementation For lease accounting projects, we believe that most implementations will be 1.5X of software costs. An extensive level of process re-engineering, data collection and project management that will be required for most companies.

41 How to Get Started with Your Lease Accounting Project 41 1) Understand the New Rules 2) Situational Assessment 3) Staff the Project Team 4) Evaluate Your Leasing Program 5) Define Project Scope & Strategy 6) Define Budget & Timeframes PHASE 6 SUMMARY ü Develop a rough implementation timeframe based upon the maturity of your current lease accounting program and the complexity of leasing portfolio. Most companies will need between 6-18 months to implement. ü Develop a ballpark budget estimate that includes a financial impact assessment; accounting and tax transition; lease accounting software; data collection and implementation tasks. Use a Top Down rule of thumb approach or a Bottom Up cost estimation to arrive at a figure. ü Submit your budget for approval by an executive steering committee. ADDITIONAL ACTIONS TO CONSIDER Run a sampling of 20 leases through the data collection and accounting process to arrive at a per lease time estimate. Multiply the number of leases by the per lease estimate to arrive at a budget figure. Consider participating in a Solution Workshop with a lease accounting software vendor or consulting firm. The outcome should be to better define your software requirements for lease accounting and administration.

42 BEYOND 90 DAYS THE REST OF THE JOURNEY

43 How to Get Started with Your Lease Accounting Project 43 THE REST OF THE PROJECT With budget secured, you will be ready to start the implementation phase of the project. Some of the key tasks in the remainder of the project will include: Select a Software Vendor Evaluate the various lease accounting and administration applications on the market. Watch demos, review RFP responses and pricing to select the best fit for your needs. Select an Implementation Partner Decide if you want to implement with inhouse resources or an outside firm. Review the expertise, pricing and implementation approaches of various firms to identify the best fit for your project. Data Capture and Upload - You will need to locate each of the leases; translate them into English; capture the necessary data; validate the data accuracy; and resolve any discrepancies. Software Testing - You will need to perform functional testing on the new lease accounting software to ensure that it produces proper accounting results for both the current and new standard. Update Policies and Controls As necessary, update the policies and controls associated with lease administration to ensure they are compliant with SOX and other governance requirements. Accounting Transition Apply the new lease accounting rules to your portfolio. Identify contracts which meet the expanded definition of a lease; perform the accounting classification and then calculate the appropriate journal entries. Training and Communications - Train the end-user community that will be accessing the lease accounting application on new systems and processes.

44 How to Get Started with Your Lease Accounting Project 44 IMPLEMENTATION JOURNEY Data Upload Identify Data Sources Abstract from Contracts Clean Up Data Accounting & Policies Apply New Accounting Rules to Leasing Data Define New Policies & Controls Final Training Communications Systems Go Live Software Implementation Select Software Vendor & Implementation Partner Install & Configure Software

45 How to Get Started with Your Lease Accounting Project 45 HOW LEASEACCELERATOR CAN HELP Understand the New Rules Situational Assessment Staff the Project Team Evaluate Your Leasing Program Define Project Scope & Strategy Define Budget & Timeframes Executive Briefing Our experts will provide an overview of the key things to know about the new standards and common implementation pitfalls Business Process Assessment We will work with your crossfunctional team to document current state and design future state business processes Leasing Maturity Assessment Compare your current processes, systems and controls to industry best practices. Understand your strengths and weaknesses. ROI Analysis Solution Workshop Our experts will help you to define your requirements. Decide whether you need a lease accounting system or a broader lease administration application. Use our detailed ROI model to project cost savings from enhanced real estate and equipment lease administration.

46 LeaseAccelerator offers the market-leading SaaS solution for Enterprise Lease Accounting, enabling compliance with current and new FASB and IFRS standards. Using LeaseAccelerator s proprietary asset-based Global Lease Accounting Engine, customers can account for all categories of leases including real estate, fleet, IT, material handling and other equipment at an asset-level. On average, LeaseAccelerator s lease Sourcing and Management applications generate savings of 17% on equipment leasing costs with smarter procurement and end-of-term management. 46