Navigating the brave, new world of equipment lease management April 20, 2016

Transcription

1 Navigating the brave, new world of equipment lease management

2 Administrative matters For better viewing experience, close all other applications For better sound quality, use headphones To enlarge the slides, click the bottom right corner of the slide window and drag to the desired size or click the green maximize button at the top right of the slide window To download today's presentation, click on the Resources icon on the left Submit questions any time during the session using the Q&A window on the left side of your screen If you experience any technical difficulties during the polling sessions, reply to the question in the Q&A window and include the poll number 2

3 CPE administrative details To receive full 1 CPE credit for today s webcast, you must be active during the entire 60 minute webcast. You will be required to answer 5 polling questions during the webcast to verify attendance. You will have 2 minutes to answer each timed poll. CPE credit is not offered for audio only attendees or viewers of the replay. To download the slides and polling questions, click on Resources. Use Q&A to ask questions during the webcast, or to respond to polls manually if you have a technical issue. 3

4 Today s presenters Shane Foley Principal, Risk Assurance shane.p.foley@pwc.com Diane Jennings Director, Advisory Financial Services diane.b.jennings@pwc.com Robyn Conlon Director, Risk and Compliance Analytics robyn.conlon@pwc.com Michael Keeler CEO, LeaseAccelerator keeler@leaseaccelerator.com 4

5 Agenda 1 Standard highlights 6 2 Equipment leasing s unique aspects 8 3 Equipment lease management challenges and issues 4 Equipment lease management solution 20 5 Example business case savings calculation 27 6 Implementation case studies 32 7 Q&A

6 Standard highlights 6

7 Standard highlights (lessee s perspective) 1 6 Not converged with IFRS Effective: public private Virtually all leases on balance sheet 2 5 Modified retrospective approach Enhanced disclosures Dual P&L recognition model for US GAAP 3 4 7

8 Equipment leasing s unique aspects 8

9 Equipment lease management Equipment lease management encompasses the people, processes, data and technology necessary to meet requirements specific to the equipment leasing function. Accounting entries Calculations Data Business processes and controls Asset and payment dynamics Transaction lifecycle Stakeholders Motivations and objectives Culture Unique to equipment leasing 9

10 Numerous categories of equipment types Airplanes Automobiles Communications Lab & research equipment Medical equipment Trucks Industrial manufacturing equipment Power & utilities equipment Technology equipment 10

11 Payment variations Variable payments Scheduled changes in lease payments during its term Variable payments Advance rents Advance rents Common advance rent setups are (1) First, (2) First and Last, and (3) First Two Maintenance, property taxes, insurance Additional charges Maintenance may have annual escalations Property taxes may be billed separately or bundled with lease payment Insurance may or may not have escalations Floating rates Periodic adjustment to payment or term based on change in index rate index Usage based Base payment plus excess usage charges Floating rates Usage based Skip payments Skip payments Leases can be set up for skip payments aligned with a company s cash flows (e.g. farming company aligns payments with harvest) 11

12 Arlington Fort Worth Arlington Arlington Fort Worth Fort Worth Asset-level decisions Different terms 48 month term Different locations & moves 60 month term Different end-of-term options Return Renew Return Renew Buy 12

13 Multi-tiered asset information Multiple-asset lease, each asset with a different business owner. Asset 2 Asset 2 components & business owners: Three servers - IT Router & firewall - Network Services Two power supplies & UPS - Facilities Maintenance agr. - IT Accounting In-term adjustment The two power supplies were traded in for new power supplies co-terminous with the existing lease 13

14 Polling question #1 What is the approximate size (number of leases) of your equipment lease portfolio compared to your real estate portfolio? A. Considerably larger B. Considerably smaller C. Similar in size D. Unsure E. Not applicable/ professional 14

15 Equipment lease management challenges and issues 15

16 Many challenges to managing equipment leases today Ownership Processes Lease vs buy Sourcing Data Multiple stakeholders (Procurement, Treasury, Accounting), but no process owner for leasing Decentralized processes without formal policies/ controls Lease vs buy model not used or multiple ones exist Bundled asset purchases and financing may miss potential cost savings Operating lease data in spreadsheets - missing and/or outdated data 16

17 Cost leakage Example: 36 month lease Acquisition Payments 1 through 12 Payments 13 through 24 Payments 25 through 36 Months past end-of-term No competitive bids Minimal competitive bids Acquisition and financing bundled No notification of upcoming end-of-term Delay in returning equipment Purchase vs return when asset unlocatable 17

18 Potential data issues Complexity Can t find contracts High volume of leases/ assets Data gaps Multiple data sources Data quality Inconsistent data Embedded leases Amendments 18

19 Polling question #2 Where do you expect to see the biggest opportunity for operational improvement with regards to equipment leasing? A. Business processes and controls B. Lease vs. buy model C. Lease rates D. Cost leakage E. Don t know F. Not applicable/ professional 19

20 Equipment lease management solution 20

21 Why an equipment lease management solution? A lease management solution not only enables standard compliance, but it can also provide the means to better oversight of the lease function achieving better lease decisions and cost savings. Data Initial data capture Data remediation Financial reporting impact analysis Portfolio operational analysis System Software solution selection Leasing solution design, build and test Data migration Ongoing Ongoing data capture Lease operations Reporting and periodic analysis April

22 End-to-end data flow When it comes to equipment lease management, data collection and quality represent a critical component of the lease lifecycle. Bridging the data divide: combining technology and expertise Import source documents and/or existing system extracts Data quality and validation Iterative feedback loop Data extraction and transformation Equipment lease management solution 22

23 Polling question #3 Where is the majority of your equipment lease contract data stored? A. In file cabinets B. Imaged/digitized in repositories C. In leasing systems D. Don t know E. Not Applicable / professional 23

24 Features to look for Common lease payment structures Configurable lease vs buy model Individual asset records with asset & business info Financial modifications Workflows for process adherence Equipment lease management solution Competitive bidding Automated notifications Audit trail Integration capabilities (e.g. GL, AP) Portfolio reporting and analysis 24

25 Straight-through processing ERP system Mfrs Resellers Purchase requests, PO s, financing bids, lease contract documents Lessors Lease sourcing Lease sourcing Data assurance Adds, moves, upgrades, changes, EOT actions Portfolio performance & management Corporate hierarchy, GL codes, lease payment disbursements Accounting, reporting & compliance Procurement system Adds, moves, upgrades, changes, EOT actions Asset management system 25

26 Polling question #4 Besides standard compliance, what is the next most important feature you are looking for in an equipment leasing system? A. Configurable lease versus buy model B. Lease portfolio reporting and analytics C. Automated notifications D. Competitive bidding E. Transactions audit trail F. Not sure G. Not applicable/ professional 26

27 Example business case savings calculations 27

28 Potential savings example Competitive bidding Lease life cycle Acquisition Original lease term Months past end-of-term For illustrative purposes only. Actual results will vary, depending on specific circumstances. $ in millions Calculate your avg number of active leases during a FY 1,000 FY1 FY2 FY3 Total Calculate your current avg gross rent payments per lease (before competitive bidding) Calculate current gross lease rent expense before competitive bidding and break down by year Estimate the avg lease payment % savings you will achieve after competitive bidding $ 100,000 Calculate your new estimated avg gross rent payments per lease $ 93,000 Calculate estimated gross lease rent expense AFTER competitive bidding and break down by year $ 100,000,000 $ 33.3 $ 33.3 $ 33.4 $ % $ 93,000,000 $ 31.0 $ 31.0 $ 31.0 $ 93.0 Estimated FY lease rent expense savings $ 2.3 $ 2.3 $ 2.4 $

29 Potential savings example End-of-term Lease life cycle Acquisition Original lease term Months past end-of-term Considerations: Estimated savings will be less if it is determined the expired leases would typically be renewed for reduced rents. If expired leases would typically be upgraded, then no savings, but expense would be for using new equipment vs. used. Estimate your current gross lease rent expense $ Calculate portion of the portfolio expected to expire 33% Calculate the estimated annual payment for the portion of the portfolio expected to retire $ Calculate the monthly payment for the expiring leases $ 2.78 Estimate the % pf expired leases that will have no action taken on them so lease payments will continue Calculate lease payments that are continued past their expiration date $ 0.28 Calculate the average number of months past end-of-term lease payments are continued $ in millions Calculate the estimated total expired lease rent expense savings per FY $ % 9 For illustrative purposes only. Actual results will vary, depending on specific circumstances. 29

30 Assemble the business case Competitive bidding savings Year 1 Year 2 Year 3 Year 4 Year 5 First third of portfolio replaced in Year 1 $ 2.3 $ 2.3 $ 2.4 Next third is replaced in Year 2 $ 2.3 $ 2.3 $ 2.4 Final third is replaced in Year 3 $ 2.3 $ 2.3 $ 2.4 Estimated competitive bidding savings $ 2.3 $ 4.6 $ 7.0 $ 4.7 $ 2.4 Estimated timely end-of-term action savings $ 2.5 $ 2.5 $ 2.5 Estimated GT lease rent expense savings $ 4.8 $ 7.1 $ 9.5 $ 4.7 $ 2.4 Estimated GT 5-year savings $ 28.5 For illustrative purposes only. Actual results will vary, depending on specific circumstances. Cost analysis: The business case is a cost/benefit analysis and shows both estimated savings and costs. Assuming the business case is related to implementing the new standard, some of the costs that must be considered are: Data extraction and remediation costs Licensing fees of the new software Software implementation costs Other consulting costs 30

31 Polling question #5 Where are you in your plan to get your equipment leases into a leasing system? A. Identifying vendor solutions B. Working on selecting a vendor solution or have decided to use inplace real estate solution C. Implementing the vendor solution D. Keeping the leases on spreadsheets E. Haven t started yet F. Not applicable/ professional 31

32 Implementation case studies 32

33 Representative implementation case studies 1 Competitive sourcing Industrial manufacturer reduced cost of new equipment leases 2 End of term management Industrial manufacturer reduced evergreen fees 3 Buyouts Cloud provider reduced end-ofterm buyouts for IT equipment 4 Lease vs buy analysis IT hardware OEM reduced lease processing from weeks to days 33

34 Key takeaways Equipment leasing has unique characteristics that require specific system capabilities 1 2 A lease management system can enable compliance with the standard and provide a means to run the leasing operations A lease management system can help enable potential cost savings through improved data quality, better decisions, streamlined processes, increased competitive bidding, and timely endof-term actions 4 3 Process automation and a drive for achieving continuous savings can be a motivator for capturing and maintaining quality lease data 34

35 Q&A 35

36 Additional resources See the Resources tab on your webcast console Refer to: Leases edition A guide to the new US GAAP leases standard In depth: The leasing standard A look at the new model and its impact In the loop - Are leases embedded in your contracts? Leasing standard webcast series New Lease Accounting Standard Handbook Spend Management ebook Get Ready for the New Lease Accounting Rules 36

37 Thank you This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it All rights reserved. refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details.