LEASE ACCOUNTING COST SAVINGS 6WAYS TO REDUCE YOUR ACCOUNTING COSTS WITH 6SOFTWARE Developed By: www.leaseaccelerator.com
Table of Contents Cost Savings for Lease Accounting 1 2 3 4 5 6 Data Collection 03 Lease Classification 05 External Reporting 08 Internal Reporting & Reconciliation 11 Audits 14 Hiring and Training 17 www.leaseaccelerator.com PAGE: 01
Cost Savings for Lease Accounting With the implementation deadlines for new lease accounting standards approaching in the coming years, many Controllers and accounting organizations are considering Lease Accounting Software. At some companies, the business justification for investing in a specialized software application is straightforward. Developing the systems, processes and controls to support major accounting changes is viewed simply as a cost of doing business. For other companies, however, a more detailed business case might be needed to support the investment. Numerous cost savings opportunities can be realized by improving the sourcing and administration processes for equipment and real estate leases. Although these cost savings can be substantial, they require a broader multi-year, transformational effort across the enterprise. This begs the question, Are there any savings to be achieved by automating processes within the four walls of the accounting organization? FASB ASC 842 FASB ASC 842 In this ebook, we explore six opportunities for accounting cost savings in areas such as classifying leases, generating disclosures, reconciling financials and supporting audits. www.leaseaccelerator.com PAGE: 02
Data Collection 1 The new lease accounting standards will require companies to maintain a much deeper set of data about their real estate and equipment leases. Up to 100 key terms, such as base and variable rents; payment timing and frequency; and options for purchase, renewal or extension will need to be captured for each lease. The amount of time required to analyze a lease and collect data can vary from 1-2 hours to 6-8 hours per lease. To implement the new lease accounting standards, a massive amount of work will be required to collect all of the necessary data. Assuming an average of 4 hours per lease, a portfolio of 5000 leases would require 20,000 man-hours of analysis. The on-going abstraction of leasing data will also be significant. If you sign 1000 new leases per year, a workload of 4000 man-hours per year (or two Full-Time Equivalents) will be required. Fortunately, data abstraction technologies can be used to automatically scan leases and extract all the key data needed for accounting purposes. These data abstraction technologies can now achieve accuracy rates that exceed 90 percent. As machine learning and artificial intelligence capabilities increase, the success rate will approach 100 percent in the not too distant future. www.leaseaccelerator.com PAGE: 03
Data Collection 1 Lease Data Abstraction Technology Leases & Documentation Lease Accounting Software www.leaseaccelerator.com PAGE: 04
Lease Classification 2 Under current US GAAP standards, the accounting organization must classify each new lease as an operating lease or a capital lease. With the new standards, FASB has introduced a new classification scheme based on operating and finance leases. Some companies may test each individual lease if they frequently structure leases approaching the thresholds that differentiate between operating and capital leases. For example, if the Present Value of Rents for many leases approaches 90 percent of Fair Market Value, there may be a need for testing each individual lease. START Other companies may apply policies to certain categories of leases rather than test each individual lease. For example, there may be no need to test each individual vehicle lease if a company structures all of its fleet financing to be safely below the thresholds for capital leases. STOP www.leaseaccelerator.com PAGE: 05
Lease Classification 2 For companies that perform high volumes of lease classification tests, Lease Accounting Software applications can reduce the amount of time required to perform the calculations. But an even bigger impact of Lease Accounting Software often comes from reducing the potential for errors. Most organizations use home-grown spreadsheets to conduct the classification testing. And lease classification testing worksheets are prone to errors just as any other spreadsheets are. A simple mistake, such as entering the wrong Incremental Borrowing Rate, could result in an incorrect lease classification. This error could have a cascading effect that ultimately impacts financial disclosures. www.leaseaccelerator.com PAGE: 06
Lease Classification 2 Capital Lease Leases & Documentation Classification Decision Economic Life Fair Value Ownership Transfer Bargain Purchase Operating Lease www.leaseaccelerator.com PAGE: 07
External Reporting 3 As part of the quarterly Record-to-Report process, financial data about leases must be collected across the business to produce the necessary external reports. With the new lease accounting standards the level of quantitative and qualitative disclosure required will increase with leases needing to be tracked at the asset-level. For companies with large, complex leasing portfolios the process to collect the necessary financial data can be quite time consuming. The accounting groups within each individual business unit (or each geographic region) must update their records about real estate, IT, fleet and equipment leasing obligations. The business unit (or regional) data is then aggregated into a spreadsheet. Each of these business unit level spreadsheets are then forwarded onto a centralized, corporate group that consolidates the leasing data into one rolled up report. www.leaseaccelerator.com PAGE: 08
External Reporting 3 IFRS 17 IFRS 16 FASB ASC 842 FASB ASC 840 Lease Accounting Software applications eliminate much of the manual effort required to produce the financial data needed for quarterly or annual reports. Lease Accounting applications keep up-to-date records on all leases across the business. As a result, the quarterly Record-to-Report process for leasing becomes a matter of running a few reports, rather than a laborious, multi-week effort to aggregate data. With a few mouse clicks, accounting groups can generate all the debits and credits needed for financial disclosures. www.leaseaccelerator.com PAGE: 09
External Reporting 3 Lease Accounting Software SEC Reporting Team Public Financial Disclosures Business Unit A Business Unit C Business Unit A Business Unit D www.leaseaccelerator.com PAGE: 05 10
Internal Reporting & Reconciliation 4 In addition to the corporate-level public disclosures, organizations must also perform internal reporting at a business unit level. Financials for the leasing program are required to support cash forecasting and annual budgeting activities. Various reports may be required to understand how leasing impacts Profit and Loss as well as the overall economics of the business. However, many companies struggle to report on leasing financials at a business unit level. The reporting process is spreadsheet-driven and is often inconsistent across business units, with each division creating a different set of reports with different levels of detail. Reconciling data between the overall corporate-level financials and the business unit level is a challenge when more granular income statements or balance sheets need to be created. 8 5 9 x 6 2 3 - = www.leaseaccelerator.com PAGE: 11
Internal Reporting & Reconciliation 4 Lease Accounting Software applications can significantly reduce the amount of time required to produce reports and reconcile leasing data for internal organizations. Leases and individual assets on lease schedules are tied back to specific business units, geographic regions or product lines. As a result, reconciling and reporting needed for internal budgeting, cash forecasting and profitability analysis become highly automated and repeatable. www.leaseaccelerator.com PAGE: 12
Internal Reporting & Reconciliation 4 Lease Accounting Software 1546829014 Geography Business Unit Product Line Asset Type www.leaseaccelerator.com PAGE: 13
Audits 5 Responding to questions from external auditors about the classification or reporting of leases can be a time-consuming aspect of lease accounting. With the new accounting standards, leased assets and liabilities will be reported as individual lines on the balance sheet. As a result, companies should expect a much higher level of scrutiny from their auditors. Additionally, the importance of ensuring that accurate classification testing is performed and supporting documentation is available increases significantly.? At most companies, the data and documentation to support leasing financials is not well organized. Leasing data is not housed in a centralized application. Instead the data is distributed across enterprise resource planning (ERP), procurement and fixed asset systems. The most reliable data is often stored in spreadsheets on hard drives of lease administration personnel around the world. When an auditor inquires about a particular transaction, the accounting team is forced to go on a scavenger hunt, searching through filing cabinets, tracking down asset owners or emailing the leasing companies to get supporting documentation. www.leaseaccelerator.com PAGE: 14
Audits 5 With a Lease Accounting Software application, the amount of time required to research issues and collect the supporting documentation can be significantly reduced. Within the application, auditors can drill down from lease disclosures to the corresponding lease schedule and even to individual assets. All of the lease documentation from the Master Lease Agreement and Schedules to Purchase Orders and Invoices is located within a single repository. Additionally, qualitative information such as accounting policy elections and judgments as well as the results of Lease Classification tests can be attached to individual leases. $ $ $ www.leaseaccelerator.com PAGE: 15
The Leasing Audit Scavenger Hunt Who has the Documentation? Corporate Treasury Legal & Contracts Accounts Payable Information Technology Operations Sourcing & Procurement www.leaseaccelerator.com PAGE: 16
Hiring and Training 6 The introduction of new lease accounting standards will compound the challenges for classification testing and audit support as well as internal and external financial reporting. The current lease accounting standards are relatively simple as compared to FASB ASC 842 and IFRS 16. Staffing the appropriate level of expertise needed to comply with new, more complex lease accounting standards will present another challenge, especially at the business unit level. Divisional Controllers in Europe, Asia Pacific and throughout the Americas will need to ensure that their accounting groups are well-versed in the new standards. In some cases, they will need to hire outside talent. With lease accounting expertise in high demand, recruiting for these roles will be challenging over the coming years. Current personnel will need to be trained in the new standards as well, which will likely be a time-consuming process. As with most accounting changes, the risk of errors due to misinterpretation or incorrect application of the standards will be highest in the first few years as personnel are being hired and trained. www.leaseaccelerator.com PAGE: 17
Hiring and Training 6 With a Lease Accounting Software application, the amount of time required to research issues and collect the supporting documentation can be significantly reduced. Within the application, auditors can drill down from lease disclosures to the corresponding lease schedule and even to individual assets. All of the lease documentation from the Master Lease Agreement and Schedules to Purchase Orders and Invoices is located within a single repository. Additionally, qualitative information such as accounting policy elections and judgments as well as the results of Lease Classification tests can be attached to individual leases. www.leaseaccelerator.com PAGE: 18
Hiring and Training 6 Hours Per Year Spent on Lease Accounting Tasks Data Collection Lease Classification External Reporting Audit Support Current Standards New Standards Source: LeaseAccelerator Estimates www.leaseaccelerator.com PAGE: 19
www.leaseaccelerator.com 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.