WHAT DO WE LEASE? CONDUCTING AN ENTERPRISE-WIDE CENSUS. THE TEN PLACES TO LOOK TO FIND ALL OF YOUR LEASES

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1 WHAT DO WE LEASE? CONDUCTING AN ENTERPRISE-WIDE CENSUS THE TEN PLACES TO LOOK TO FIND ALL OF YOUR LEASES

2 How to Conduct an Enterprise-Wide Lease Census 2 WHAT DO WE LEASE? Since the publication of the new lease accounting rules, one of the most common questions asked by Fortune 500 companies is - How do I find out what we lease? In most cases, your real estate team knows what buildings we lease. But what about all the other things you lease - photocopiers, office furniture, laptops, servers, forklifts, trucks, cars or even aircraft? It might sound surprising that big companies would not know what they are leasing, but it is understandable when you consider that most large organizations have highly decentralized leasing processes. Of course, it is inaccurate to say that any company doesn t know what they lease. Various people within the organization know exactly what is leased and what is owned. But the leasing data is not centralized into a single database. And in fact, until the recently announced lease accounting changes, there was little accounting motivation to track all leases in a single enterprise-wide application. But creating a master list of your leases is actually not that hard. It is simply a matter of identifying the individual people within the organization that know what buildings, vehicles, furniture, laptops and other equipment is being leased. To find the people simply follow the lifecycle of a lease as it moves through your organization. Start by asking the five questions on Page 4.

3 How to Conduct an Enterprise-Wide Lease Census 3 WHAT DO YOU LEASE? Real Estate IT & Data Center Office Furniture Vehicle Fleet Medical Equipment Material Handling Retail Store Equipment Aircraft Manufacturing Equipment

4 How to Conduct an Enterprise-Wide Lease Census 4 FIVE QUESTIONS TO ASK Who negotiates the leases? Who provides the lease? Who manages the leased assets? Who reports on the leases? Who pays for the leases? Every lease has a contract that is likely negotiated by procurement, legal counsel and perhaps your treasury organization. These groups should have a good idea what is being leased, and where the contracts reside. There is a leasing company on the other end of every contract. These might include commercial banks, captive finance organizations or independent leasing companies. These lessors definitely know what you are leasing, because they bill you for each lease on a periodic basis. Someone in the organization is accountable for managing the things you lease (assets). For example, IT probably manages your leased laptops and data center gear. The corporate real estate group probably manages the leases for your buildings, warehouses, stores and manufacturing plants. The logistics teams probably manage the leased forklifts and trucks. These asset owners should have a handle on what is being leased. Various finance groups are responsible for ensuring that property taxes are paid, insurance coverage is obtained; and that the assets are properly reported for under the current accounting rules. As a result, organizations such as financial reporting, tax and treasury should have records on what you are leasing. Accounts Payable is responsible for ensuring that the invoices for leases are paid monthly (quarterly or other periodic basis). As a result, the A/P department should know what purchase orders and recurring payments are being made that could be leases.

5 How to Conduct an Enterprise-Wide Lease Census 5 TEN PLACES TO LOOK 6 Brokers Lessors 8 Treasury 10 IT 3 s Fleet 4 5 Real Estate Accounts 1 Financial Payable 2 Reporting 9 Procurement

6 How to Conduct an Enterprise-Wide Lease Census 6 ACCOUNTS PAYABLE In our experience, the A/P team is the most reliable source for getting a comprehensive, enterprise-wide list of what you lease. Ask your A/P team for a report of all invoices that are paid on a regular basis. Don t just use last month s data, because some leases are only invoiced on a quarterly, semi-annual or annual basis. The list of recurring payments will include not only what historically have been considered leases, but also FASB s expanded definition of a lease, which includes some outsourcing and service contracts :00 You can search through the Payables report to identify payees and payments that might be leases. Most A/P departments have access to lease PO data, such as total, allocated and unallocated funds along with A/P information. Also, if you have multiple A/P systems in different regions or entities, be sure you are analyzing all of them.

7 How to Conduct an Enterprise-Wide Lease Census 7 FINANCIAL REPORTING Under the current lease accounting standards, there is a need to report capital leases on the balance sheet and operating leases in the notes disclosure. Drill down from the note disclosure to the individual leases making up those totals, and find out who in your organization is responsible for collecting the lease data today and how it is being tracked. Don t be surprised if you end up following a daisychain of spreadsheets across various groups in the organization. The Excel files may not tell you exactly what assets are being leased, but they may provide important clues as to who to ask (or where to go) for additional information. If the note disclosure has survived previous audits, then there has to be support for the figures disclosed. If necessary, reach out to internal audit for their assistance.

8 How to Conduct an Enterprise-Wide Lease Census 8 IT ORGANIZATION Are you leasing laptops, desktops, printers, servers, routers, switches, software, storage devices or other data center equipment? These are among the most widely leased categories of assets due to the short lifecycles and obsolescence associated with these technologies. At most companies, the accounting, procurement and treasury organizations lack strong visibility into IT leases. Ask your IT organization team for a list of all the assets that you are leasing. Most large IT organizations have an IT Asset Management system that tracks the serial numbers, hardware configurations, software applications and vendor contract data for each piece of technology you own. IT Asset Management systems also track which assets are owned versus which are leased.

9 How to Conduct an Enterprise-Wide Lease Census 9 FLEET MANAGEMENT Many organizations lease the vehicles used to perform field service, product transportation or customer deliveries. In some cases these vehicles are managed by a centralized group. In other organizations the ownership is decentralized. Find out who manages your vehicles then ask them for a list of all the trucks, vans, automobiles and other vehicles they are leasing. If you are leasing a fleet of more than1000 automobiles then you probably have a Fleet Management application. These systems typically have a database of all the Vehicle Identification Numbers; service histories; driver assignments and leasing details for each asset.

10 How to Conduct an Enterprise-Wide Lease Census 10 CORPORATE REAL ESTATE TEAMS AND BROKERS A growing number of mid-size and large organizations have centralized real estate management into a single organization. Others have outsourced their real estate administration to a specialized provider such as Jones Lang LaSalle or CBRE. Ask your real estate group (or broker) for a list of the leased properties they are managing. This will probably be the easiest category of leases to account for given that a centralized organization and system exists. If you are leasing more than 50 buildings then your company (or broker) may have a Lease Administration application (or Integrated Workplace Management System). These systems typically track detailed records for each lease including landlords, termination dates, expansion clauses and contractual terms.

11 How to Conduct an Enterprise-Wide Lease Census 11 OTHER ASSET OWNERS The other asset owners in your business will vary by industry. If you are operate in the supply chain, you may lease forklifts, conveyors, pallet jacks or other warehouse equipment. Ask your logistics team for a list of leased assets. If you are in the retail industry, you may lease Point of Sale systems, refrigeration units or display shelves. Ask your Store Operations team for a list of the equipment you are leasing. If you are in the health care industry, you might lease MRI machines, hospital beds or medicine carts. Ask your Hospital Administration team to provide a list of leased assets.

12 How to Conduct an Enterprise-Wide Lease Census 12 EQUIPMENT LESSORS The lessors themselves have a vested interest in maintaining accurate data about each individual lease and underlying asset. Equipment lessors such as commercial banks, vendor captives and independent lessors each use sophisticated leasing software for pricing and credit analysis, servicing and billing. As a result, most reputable lessors can easily pull the details of all leases for any particular customer. Use your Accounts Payable application to identify the leasing companies you are paying regularly. Then contact the lessors directly for a list of your current leases. Even if you are able to obtain all required data independent of your lessor, it is good practice to periodically reconcile your internal data against a third party.

13 How to Conduct an Enterprise-Wide Lease Census 13 PROCUREMENT Although requests for leases may originate from various departments (real estate, IT, logistics, store operations), all leases ultimately need to flow through the Procurement and Legal organizations. These two groups negotiate the pricing and contractual terms for most leases. Ask the procurement and legal organizations to provide a list of relevant contracts. Don t just ask for contracts that have the word lease in the title; you will need to examine outsourcing and service contracts as well for possible embedded leases.

14 How to Conduct an Enterprise-Wide Lease Census 14 CORPORATE TREASURY At some companies, the treasury organization has taken ownership of the leasing process. As a result, treasury may be integrally involved with procurement in negotiating and renewing leases. Ask your treasury group if they maintain a list of known real estate and equipment leases

15 How to Conduct an Enterprise-Wide Lease Census 15 NEXT STEPS Conducting an enterprise-wide lease census is just the first step in a longer journey towards complying with the new lease accounting standards. The most time-consuming aspect of the project will be actually collecting all the data needed to classify and account for the leases. It will take 2-4 hours per lease to collect the data. If you have hundreds or thousands of leases you will need to staff a small team of contract analysts to manage the process, which will take 3-6 months for most Fortune 500 companies. To start the process you will need to create a comprehensive list of all the leasing data needed to comply with the new standards. Then you will need to collect the data from the lessors, asset owners and other stakeholders (think treasury, procurement, accounts payable). Some data will be easily uploaded into a lease accounting application, while others will be in PDF or paper format requiring an abstraction process. In many cases, the data you collect will be incomplete or inaccurate, resulting in a data cleansing and reconciliation process. Additionally, you will need stakeholders to attest to the accuracy of the data. Finally, you will need to append tax rate, depreciation and other corporate variables to each lease. The result will be a complete set of accurate, up-to-date data that can be uploaded into your lease accounting application. If this sounds like a complex, time-consuming process well, that s because it is. Many companies will struggle to find available resources and the necessary expertise to collect all the necessary lease accounting data in a timely manner. Considering enlisting the professional services division of a lease accounting software vendor or the consulting resources of a Big Four firm to assist you. LeaseAccelerator offers data abstraction and collection services as well as an enterprise lease accounting application.

16 How to Conduct an Enterprise-Wide Lease Census 16 COLLECTING YOUR LEASE ACCOUNTING DATA PLANNING AND ANALYSIS Lease Census Resources Needed Required Data Comparing Standards Data Census What types of assets do we lease? Identify skills needed and resources What fields does new standard require? What is difference between new and current standard? What data do we collect today in systems? DATA AGGREGATION AND UPLOAD Aggregate Data Abstract Data Cleanse Data Attest Data Populate Database Financial Variables Aggregate data from various systems & groups AP Lessors Asset Owners Accounting Procurement Capture leasing data from Spreadsheets Files PDFs Images Paper Docs Fix data (as necessary) Doesn t reconcile Missing fields Incorrect values Gather additional fields: EOT plans Actual location Cost center Asset owner Bundled service costs Upload to lease accounting app Normalize data Bulk upload Test samples For each lease: Economic Life IBR Debt Rates Equity Rates Tax Rates GL Codes Depreciation

17 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. 17