LEASE ACCOUNTING AND YOUR OTHER FINANCIAL SYSTEMS THE 10 ENTERPRISE SYSTEMS THAT TRACK LEASING DATA Developed For:
TABLE OF CONTENTS 1 2 3 4 5 6 7 8 LEASING DATA ACROSS THE ENTERPRISE FINANCIAL SYSTEMS ASSET MANAGEMENT SYSTEMS SUPPLY CHAIN SYSTEMS MASTER DATA ALTERNATIVE APPROACHES TECHNOLOGY AND AUTOMATION SUMMARY AND RECOMMENDATIONS 03 11 25 37 45 49 52 62
LEASING DATA ACROSS THE ENTERPRISE
FINANCIAL SYSTEMS As you are evaluating, selecting, and implementing lease accounting software, you will need to consider how the new application will interact with the other financial and operational systems in your IT ecosystem. Some interactions are obvious while others are not. 01 GENERAL LEDGER Perhaps the most important system to consider is the general ledger. You will want the debits and credits created from your leasing sub ledger to be uploaded into your GL on a monthly basis. The lease accounting data can be consolidated with other journal entries to generate the appropriate financial reports and disclosures. 02 ACCOUNTS PAYABLE In order to generate the appropriate journal entries, your lease accounting application will need to interact with various other systems. For example, you will need to capture details about leasing invoices and disbursements from the accounts payable system. 4
MORE FINANCIAL SYSTEMS 03 ACCOUNTS RECEIVABLE You will need to capture any collections or refunds related to leases that might be tracked in your accounts receivable system. 04 FIXED ASSET MANAGEMENT SYSTEMS Your fixed asset management system needs to maintain information about the plant, property, and equipment that is leased throughout the business. You will need to decide which system will calculate depreciation for leased assets and how you will keep the inventory of leased assets synchronized. 5
ASSET MANAGEMENT SYSTEMS 05 06 07 REAL ESTATE ADMINISTRATION, IT ASSET MANAGEMENT SYSTEMS, & FLEET MANAGEMENT SYSTEMS In addition to financial systems, your lease accounting application will need to interact with asset management systems in your enterprise. These systems will vary depending upon the composition of your lease portfolio. If you lease a lot of buildings and land, then your lease accounting application will become critically dependent upon interactions with your real estate administration application. If you lease a large portfolio of IT and data center equipment, then your lease accounting system will need to interact with your IT asset management application. If you lease a large portfolio of company cars, vans, or trucks, then your lease accounting system may need to interface with a fleet management application. These asset management systems require the same type of detailed asset information that is required for your lease accounting. For example, the real estate administration application needs to maintain up-to-date information on new building leases and sub leases to other tenants. The IT asset management application needs to maintain accurate details on any recent asset swaps as well as lost, stolen, and damaged computers. The fleet management application probably needs to maintain the most current information for end of term renewals, buyouts, and returns for company vehicles. 56
SUPPLY CHAIN SYSTEMS 08 SOURCING AND PROCUREMENT If the appropriate controls are in place, all new leases should flow through the procurement organization with a corresponding purchase order. 09 CONTRACT MANAGEMENT Once both parties have signed, the leases should be uploaded into a contract management system. These applications serve as a repository not only for traditional leases, but also for outsourcing and service contracts that may contain embedded leases. These applications are the entry points in which new lease data is first captured within your company. Therefore, there is a strong business case for ensuring that your lease accounting application is kept aware of any new leases being recorded in these supply chain systems. 7
ERP AND MASTER DATA 10 MASTER DATA MANAGEMENT SYSTEMS To function properly, your lease accounting application needs to maintain current financial variables. For example, you would not want your lease accounting engine to use outdated foreign exchange rates or general ledger codes. Additionally, you will want your lease accounting system to be populated with up-to-date master data. You should ensure that the list of your company s physical locations, preferred leasing companies, and employee names is synchronized between your ERP and lease accounting application. 8
OTHER SYSTEMS TREASURY MANAGEMENT SYSTEMS Several of the more sophisticated treasury management systems have leasing functionality. While most do not perform lease accounting, some treasury systems do have the ability to capture the details of leases, model future cash flows, and calculate the present values. If your treasury organization depends on having accurate, up-to-date information about your leasing portfolio, then the lease accounting application may be a good source of data. OTHER ASSET MANAGEMENT APPLICATIONS The most common asset management systems that touch leases are for real estate, IT, and fleet. However, your company may also have specialized systems to track rail cars, shipping containers, corporate aircraft, telecom circuits, material handling equipment, and other types of equipment. Your lease accounting software will need to interact with these specialized asset management systems to track new leases as well as renewals and terminations of existing contracts. 9
EXTERNAL SYSTEMS TO CONSIDER LEASING COMPANIES The financial applications outlined above are all within the four walls of your enterprise. However, your lease accounting system may need to interact with external applications as well. For example, the true system of record for data about any lease actually sits outside of your organization in the lessor s systems. Ideally, whenever a new lease is signed or a lease is amended, the corresponding data should be fed directly from the lessor into your financial applications. OUTSOURCING PARTNERS Have you outsourced invoice processing, collections, or record-to-report to a BPO provider? Have you contracted with a property management firm to manage your corporate real estate functions? Have you engaged an IT outsourcing firm to manage your data centers or end user computing? If so, your outsourcing partners may be managing information about your leased assets. As a result, you may need to interact with the outsourcing provider s business applications as well as your own internal systems. 10
FINANCIAL SYSTEMS
SYSTEM #1 GENERAL LEDGER TRANSFERING JOURNAL ENTRIES The reason you are purchasing a lease accounting system is to generate the information needed for financial disclosures under the new standards. Therefore, the most important financial system that your lease accounting application will interact with is the general ledger (GL). As part of the monthly close process you will want to post the journal entries from your lease accounting sub ledger to the GL. For each journal entry, you will need to transfer details such as account number, account name, transaction amount, ledger date, transactional currency, and whether it is a debit or credit. MULTIPLE GENERAL LEDGERS For larger companies, the GL integration process can be quite complex. Most large companies have more than one general ledger running on different ERP instances around the world. As a result, you may need to export debits and credits from your lease accounting sub ledger to various GLs. Your lease accounting application should be able to track which ledger entries should be posted to which GL, thereby enabling an intelligent extract. You would not want to send leasing debits and credits from your European business to the ERP for the Asia Pacific region. KEY CONSIDERATIONS Do you have more than one general ledger? How will you ensure journal entries are routed to the appropriate ledger? How will you avoid posting duplicate entries? How do you ensure that your lease accounting application remains synchronized with the GL? 12
SYSTEM #1 GENERAL LEDGER CRITICAL CONSIDERATIONS ASSET, SCHEDULE, OR PORTFOLIO LEVEL The new standards require accounting to be performed at the asset-level. However, you probably will not want to upload asset-level debits and credits into the GL. Just as you don t transfer the details of each employee s salary, health benefits, and federal and state taxes from your payroll sub ledger to your GL, you don t necessarily need the monthly rent expense for 10,000 different laptop leases detailed in your GL. Your lease accounting application should have the flexibility to allow you to specify whether asset, schedule, or portfolio level credits should be exported. POSTING CONFIRMATIONS AND REJECTIONS Whenever you are importing journal entries into a general ledger, you will want to safeguard against the risk of errors. You should have a process to ensure that duplicate or erroneous debits and credits are not automatically uploaded to the GL. For example, you may want to stage uploads from your lease accounting system in the GL for review by a senior accountant. You will want to establish a closed loop cycle between your GLs and your lease accounting sub ledger. The GL should be able to report on which journal entries were posted and which were rejected. 13
SYSTEM #1 - GENERAL LEDGER DATA FLOWS WITH LEASE ACCOUNTING 1 As part of the monthly close process, the journal entries from the lease accounting sub ledger are posted to one or more general ledgers. ENTERPRISE LEASE ACCOUNTING Journal Entries (Debits & Credits) GENERAL LEDGER(S) Posting Confirmations and Rejections 2 The journal entries are reviewed by an accounting manager then posted to the GL. A closed loop process ensures that the lease accounting system is aware of which transactions were posted and which were rejected. 14
SYSTEM #2 ACCOUNTS PAYABLE Throughout the term of a lease, your accounts payable organization will be processing invoices and making payments to lessors. To create the proper journal entries for lease accounting, you will need visibility into the transactions being logged in your accounts payable application. There are three common interactions to consider between your lease accounting and accounts payable applications. EXPECTED PAYMENT SCHEDULE Most lease accounting systems can forecast the expected invoice amounts to be paid each month by using the data entered into the system, such as base rent, variable rent, and other scheduled payments. Once a night (or less frequently if desired), you may want to post expected payments calculated by the lease accounting application into AP. Managers processing invoices from lessors can then compare the expected charges to the actual invoiced amounts. Discrepancies can be researched and resolved to ensure that the leasing company is not being over or under paid. 15
SYSTEM #2 ACCOUNTS PAYABLE ACTUAL INVOICED EXPENSES ACTUAL INVOICED EXPENSES For each invoice received from a lessor, you will want to capture the lessor name, invoice amount, invoice number, and invoice data from the AP application. These details should be loaded into the lease accounting sub ledger to generate the appropriate variable lease expenses or operating expense accruals. In some cases, there may be invoiced expenses that were not part of the expected payment schedule. For example, some equipment contracts price monthly rent based on consumption or utilization. Think photocopiers being billed by the page. Some real estate leases include charges for monthly operating expenses. Think CAMs charging for utilities and building services. KEY CONSIDERATIONS Do you have more than one payment factory and/or shared service center? How will you ensure expected payment schedules are routed to the appropriate accounts payable application? Have you outsourced accounts payable to a third party organization? Do you need to interface with any external systems? 16
SYSTEM #2 ACCOUNTS PAYABLE ACTUAL DISBURSEMENTS ACTUAL DISBURSEMENTS Once the payment is released, you will want to capture the details of the actual disbursement made from the lessor. Details such as payment amount, payment date, payee, and invoice number will need to be uploaded into your lease accounting system to perform a clearing of the expected payment in the sub ledger. Additionally, the actual disbursements should be reconciled against the actual invoiced expenses and predicted invoice expenses for each lease. When lessors call with inquiries about remittance advices and actual payments, the lease accounting system can be used to answer questions. 17
SYSTEM #2 ACCOUNTS PAYABLE DATA FLOWS WITH LEASE ACCOUNTING 1 On a daily or weekly basis, the expected payment schedule for leases is shared with the accounts payable system. ENTERPRISE LEASE ACCOUNTING Expected Payment Schedule ACCOUNTS PAYABLE SYSTEM(S) Actual Invoiced Expenses and Disbursements 2 Invoices are validated and approved through the AP workflow. Payment is disbursed upon invoice maturity. Details of actuals are shared with the lease accounting system. 18
SYSTEM #3 ACCOUNTS RECEIVABLE The majority of transactions with leasing companies will be payables. However, there are instances in which non-trade receivables such as security deposits are collected. Additionally, if your organization sub leases portions of your real estate holdings then there may be a need to regularly collect payments from tenants. In these scenarios, there may be a need for your lease accounting application to interact with your accounts receivable system. SUB LEASE RECEIVABLES Details from the invoices sent to sub tenants each month and the payments collected from each will be needed to perform your lease accounting. As a result, details of transactions posted to your accounts receivable and billing systems will need to be visible to your lease accounting application. You will need not only the sub tenant name, amount paid, and date received, but also line item details to distinguish between lease and non-lease components. Examples might include property insurance, local taxes, or operating expenses (e.g. CAMs charges). KEY CONSIDERATIONS Do you have more than one shared service center for collections? How will you aggregate transactions from multiple accounts receivable applications? Have you outsourced collections to a third party organization? Do you need to interface with any external systems? 19
SYSTEM #3 ACCOUNTS RECEIVABLE SECURITY DEPOSITS SECURITY DEPOSITS At the end of the lease, security deposits or other funds might be collected from the lessor upon the fulfillment of contractual obligations. These funds are often received by check, and deposited and booked as a non-trade receivable in the AR application. To perform the proper end of lease accounting, the details of these security deposits and other refunds will need to be populated in your lease accounting system. 20
SYSTEM #3 ACCOUNTS RECEIVABLE DATA FLOWS WITH LEASE ACCOUNTING 1 On a monthly, quarterly, or periodic basis, rents are collected from all sub tenants. The lease accounting system is notified of receivables collected. ENTERPRISE LEASE ACCOUNTING Sub Lease Collections ACCOUNTS RECEIVABLE SYSTEM(S) Security Deposit Refunds 2 At the end of a real estate lease, the upfront security deposit is collected and booked as a non-trade receivable. The lease accounting system is notified of the amount refunded. 21
SYSTEM #4 FIXED ASSET MANAGEMENT SYSTEM Your fixed asset management system should track right of use assets just as it tracks other types of plant, property, and equipment. Maintaining an accurate inventory of leased real estate and equipment in the fixed asset system is critical for calculating the depreciation used in financial reporting and property tax calculations. Additionally, an accurate inventory of all assets is required to secure proper insurance coverage for leased real estate and equipment. Therefore, you will want to devise a strategy for synchronizing your lease accounting applications with one or more fixed asset management systems. KEY CONSIDERATIONS Which system should calculate depreciation expenses for right of use assets? The lease accounting sub ledger or your fixed asset management system? How will you ensure that the inventory list in your fixed asset system remains synchronized with your lease accounting application? Will a periodic reconciliation be required? 22
SYSTEM #4 FIXED ASSET MANAGEMENT SYSTEMS INVENTORY AND DEPRECIATION INVENTORY MANAGEMENT DEPRECIATION At a regular frequency, the fixed asset system should be updated with a list of all the real estate, vehicles, computers, airplanes, rail cars, marine vessels, material handling, and other types of equipment being leased across the enterprise. As new leases are signed, they are published with supporting details to the fixed asset system. Similarly, as assets under existing leases are renewed, terminated, or purchased, the changes are published to the fixed asset system. Another approach is to perform a periodic reconciliation between the two applications. On a weekly or monthly basis, the entire list of leased assets would be published to the fixed asset system for matching and comparison. Best practice is to calculate depreciation for right of use assets in a true lease accounting sub ledger. On a periodic basis, the depreciation amounts would be uploaded into the fixed asset system then applied to accumulated depreciation to accurately reflect Net Book Value. In this model, accounting organizations must classify leased assets as non-depreciable to avoid duplicate charges. However, not all lease accounting applications have a true sub ledger. Instead, some lease accounting systems depend upon the fixed asset management system to manage the depreciation calculations. In these scenarios, a complex process of aggregating data across multiple systems is required to generate the journal entries needed for each monthly close. 23
SYSTEM #4 FIXED ASSET MANAGEMENT SYSTEMS DATA FLOWS WITH LEASE ACCOUNTING 1 On a periodic basis, the list of right of use assets is reconciled between the lease accounting system and the fixed asset management systems. ENTERPRISE LEASE ACCOUNTING Leased Asset Inventory FIXED ASSET MANAGEMENT SYSTEM(S) Depreciation Expenses 2 On a periodic basis, the depreciation amounts calculated by the lease accounting system are uploaded to the fixed asset system then applied to accumulated depreciation to accurately reflect Net Book Value. 24
ASSET MANAGEMENT SYSTEMS
SYSTEM #5 REAL ESTATE ADMINISTRATION SYSTEM Many companies have an integrated workplace management system or a real estate administration application that serves as the system of record for all property leases. Much of the leasing data needed to perform real estate administration will also be needed to perform proper lease accounting. You will need to devise a strategy for how to keep the information in your real estate administration application and your lease accounting system synchronized. NEW LEASES Both systems will need to know when a new property lease is signed to ensure that details such as the landlord, address, commencement date, contract length, and base and variable rent can be captured. Additional details may be required if the new lease is the result of a sale/leaseback transaction or if tenant improvements are being performed prior to move-in. 26
SYSTEM #5 REAL ESTATE ADMINISTRATION SYSTEM CHANGES TO LEASES RENT CHANGES, EXPANSIONS, AND CONTRACTIONS EMPLOYEES AND PROPERTY MANAGERS REAL ESTATE SUB LEASES During the term of a 10-year, 20-year, or 30-year property lease, a number of changes can occur that might impact the accounting. Both systems will need to be updated if there is a change to variable rent schedules that is based on market indices or last year s sales performance. Another change event that requires an update to both systems is an expansion or contraction in the floor space being leased. The employee within the corporate real estate group responsible for the property may change during the term of the lease. Alternatively, your company may decide to change the property management or commercial real estate firm responsible for the building. In these scenarios, the employee or organization assigned to manage the property should be updated in both systems to ensure that the appropriate contact is listed for audit questions or periodic attestations. If you decide to sub lease part or all of a building to a sub tenant, then the details of the contract should be updated in both the real estate system and the lease accounting application. Sub tenants may want to expand, contract, renew, or terminate sub leases. These events should be captured in both systems along with the corresponding changes in rent, contract length, and payment frequency. 27
SYSTEM #5 REAL ESTATE ADMINISTRATION SYSTEM END OF LEASE END OF LEASE The initial measurement of a real estate lease under the new standards requires you to consider plans for the property at end of term. Leases which are expected to be renewed will be accounted for differently than those which are expected to be terminated. If the long-term plans for a specific property change during the term of a lease, there may be a need to reassess and modify the lease accounting. Of course, at the end of the lease, both systems need to be updated to reflect whether the lease was renewed or terminated. KEY CONSIDERATIONS Have you outsourced management or corporate real estate to a third party? Do you need to interface with any external systems? Do your existing real estate systems capture all of your property leases? Are your international leases captured in spreadsheets or an enterprise application? 28
SYSTEM #5 REAL ESTATE ADMINISTRATION SYSTEM DATA FLOWS WITH LEASE ACCOUNTING 1 2 3 New leases and sale/leaseback transactions are booked in the real estate system then communicated to lease accounting. Changes to the lease terms are recorded in the real estate system then shared with lease accounting. As decisions about renewals and terminations occur, the plans are recorded in the real estate system then forwarded to lease accounting. Rent Changes Expansions Contractions Sub Leases Employees Property Managers New Leases Sale/Leasebacks Renewals Terminations ENTERPRISE LEASE ACCOUNTING 29
SYSTEM #6 IT ASSET MANAGEMENT SYSTEM END USER AND DATA CENTER ASSETS If your company has a sizable portfolio of computer assets, then you may have an IT asset management system to track all of your laptops, servers, storage devices, telecommunications gear, networking, and data center equipment. Much of the data needed to perform proper lease accounting will also be required for IT asset management. You will need to devise a strategy for how you will keep the information in your IT asset management system and your lease accounting application synchronized. NEW IT LEASES Both systems will need to know when a new IT lease is signed to ensure that details, such as the lessor, rent schedule, payment frequency, contract length, and end of term options, are captured. IT lease schedules often have more than one asset. Both systems will need to have asset-level details, such as original equipment manufacturer name, model number, serial number, number of units, and physical location. 30
SYSTEM #6 IT ASSET MANAGEMENT SYSTEM CHANGES TO IT LEASES CHANGES TO IT EQUIPMENT LEASES During the term of a 3-year, 5-year, or 7-year equipment lease, a number of changes can occur that might impact the accounting. For example, components or assets may be swapped out during the term of a lease due to hardware failure. In other cases, you may want to upgrade the capacity or performance for an asset during the term to respond to changing business needs. Swaps and upgrades should be recorded in both the lease accounting and IT asset management system. IT ASSET OWNER CHANGES It is unlikely that the person who was responsible for managing the IT asset at the start of the lease will be in the same job (or even the same company) at the end of the lease. Alternatively, your company may decide to change the service provider or outsourcing firm responsible for managing the asset. In these scenarios, both systems should be updated to ensure that the appropriate individuals can be contacted when a periodic attestation or audit scenario arises. 31
SYSTEM #6 IT ASSET MANAGEMENT SYSTEM CHANGES TO IT LEASES END OF TERM PLANS The initial measurement of an equipment lease under the new standards requires accountants to make judgments about the reasonably certain plans for the assets at end of term. Leases which are expected to be renewed will be accounted for differently than those which are expected to be returned or terminated. If the long-term plans for an IT asset change during the term of a lease, there may be a need to reassess and modify the lease accounting. At the end of term, both systems will need to be updated to reflect whether the IT asset was purchased, returned, or retained in a formal lease renewal. RECONCILIATION Companies with a large number of moves, adds, and changes to IT systems may want to consider a periodic reconciliation process to ensure that the lease accounting and IT asset management systems remain synchronized. At a regular frequency, the inventory of right of use IT assets should be compared between the two systems to identify matches and discrepancies which require reconciliation. KEY CONSIDERATIONS Have you outsourced data center management or end user IT to a third party organization? Do you need to interface with any external systems? Which system will capture new IT leases first? Your lease accounting application or your IT asset management system? How will you reconcile differences in data between the systems? 32
SYSTEM #6 IT ASSET MANAGEMENT SYSTEM DATA FLOWS WITH LEASE ACCOUNTING 1 2 3 New end user computing and data center leases are recorded in the IT asset management application then forwarded to lease accounting. Changes to the lease terms are recorded in the IT asset management system then shared with lease accounting. As decisions about renewals, returns, and buyouts occur, the plans are recorded in the IT asset management system then forwarded to lease accounting. Swaps Upgrades Employee Changes Outsourcer Changes New Leases Renewals Returns Buyouts ENTERPRISE LEASE ACCOUNTING 33
SYSTEM #7 FLEET MANAGEMENT SYSTEM VANS, TRUCKS, AND CORPORATE CARS If your company has a sizable fleet of vehicles, then you may use a fleet management system to track all of your vans, trucks, and company cars. Much of the data needed to perform proper lease accounting will also be required for fleet management. You will need to devise a strategy for how to keep the information in your fleet management system and your lease accounting application synchronized. NEW VEHICLE LEASES Both systems will need to know when a new vehicle lease is signed to ensure that details such as the lessor, rent schedule, payment frequency, contract length, and end of term options are captured. Both systems will need to have asset-level details such as original equipment manufacturer name, model number, vehicle identification number, and physical location. KEY CONSIDERATIONS Have you outsourced fleet management to a third party? Do you need to interface with any external systems? Do your existing fleet management systems capture all of your property leases? Are company cars in European markets tracked in a spreadsheets or an enterprise application? 34
SYSTEM #7 FLEET MANAGEMENT SYSTEM CHANGES AND END OF TERM VEHICLE OWNER CHANGES It is unlikely that the person who was responsible for managing the vehicle at the start of the lease will be in the same job (or even the same company) at the end of the lease. Alternatively, your company may decide to outsource management of your fleet to a third party. In these scenarios, both systems should be updated to ensure that the appropriate individuals can be contacted when a periodic attestation or audit scenario arises. END OF TERM PLANS The initial measurement of a vehicle lease under the new standards requires accountants to make judgments about the reasonably certain plans for the assets at end of term. Leases that are expected to be renewed will be accounted for differently than those that are expected to be returned or terminated. If the long-term plans for a vehicle change during the term of a lease, there may be a need to reassess and modify the lease accounting. At the end of term, both systems will need to be updated to reflect whether the vehicle was purchased, returned, or retained in a formal lease renewal. 35
SYSTEM #7 FLEET MANAGEMENT SYSTEM DATA FLOWS WITH LEASE ACCOUNTING 1 2 3 New vehicle leases are recorded in the fleet management system then forwarded to lease accounting. Changes to the lease terms are recorded in the fleet management system then shared with lease accounting. As decisions about renewals, returns, and buyouts occur, the plans are recorded in the fleet management system then forwarded to lease accounting. Swaps Employee Changes Outsourcer Changes New Vehicle Leases Renewals Returns Buyouts ENTERPRISE LEASE ACCOUNTING 36
SUPPLY CHAIN SYSTEMS
SYSTEM #8 PROCUREMENT AND SOURCING SYSTEMS ALL LEASES START IN PROCUREMENT If the appropriate controls are in place, no new leases should be executed without the involvement of the procurement organization. A purchase request and purchase order should be generated in the e-procurement application for each new lease contract. One of the key challenges with lease accounting is ensuring that the system has a complete, accurate, up-to-date inventory of all the leases across the enterprise. Gaining visibility into all the new leases being processed through procurement systems is one way to ensure that the lease accounting system remains up-to-date. Most e-procurement systems are not configured to store all the details of leasing contracts. However, lease accounting systems would benefit from gaining visibility into purchase order information such as the PO Number, lessor name, asset descriptions, cost center, ship-to address, and employees approving the transaction. 38
SYSTEM #8 PROCUREMENT AND SOURCING LEASE SOURCING APPLICATIONS ENTERPRISE LEASE SOURCING Some companies have deployed specialized enterprise lease sourcing applications that are specifically designed to support the procurement of IT, fleet, and other equipment leases. These sourcing applications provide functions such as lease versus buy analysis, RFP generation, and competitive bid management. Once bids are received, the proposals can be automatically ranked and analyzed to identify the best source of capital. Enterprise lease sourcing applications collect much of the data needed for lease accounting during the lease versus buy analysis and RFP generation process. Once a lessor is selected, the data from the sourcing application should be published to the lease accounting system. 39
SYSTEM #8 PROCUREMENT AND SOURCING RENEWALS AND BUYOUTS RENEWALS AND BUYOUTS Procurement applications not only touch new lease contracts, but also process renewals of existing leases and end of term equipment lease buyouts. As with new leases, the procurement application does not store all of the details needed to properly account for renewals and buyouts. KEY CONSIDERATIONS Have you outsourced sourcing or procurement to a third party? Do you need to interface with any external systems? What information about leases is captured in the procurement system? Do you have a specialized system for sourcing equipment financing and leases? 40
SYSTEM #8 PROCUREMENT AND SOURCING DATA FLOWS WITH LEASE ACCOUNTING 1 Capital for new equipment leases is sourced from equipment finance vendors. Real estate leases are sourced from brokers. Purchase orders are created for new leases then shared with lessors and the lease accounting system. E-PROCUREMENT & E-SOURCING APPLICATION(S) New Leases ENTERPRISE LEASE ACCOUNTING Renewals and Buyouts 2 At the end of term, if a lease renewal or equipment lease buyout occurs, then another purchase order is generated. Purchase orders are sent to the leasing company and also shared with the lease accounting system. 41
SYSTEM #9 CONTRACT MANAGEMENT SYSTEMS NEW LEASES When a new real estate, IT, fleet, or equipment lease is established, copies of the master lease agreement and schedules should be stored in a contract management system. Details about the lease may be automatically or manually abstracted from the documents then entered into the contract system. Any data that is abstracted, either at the schedule level or asset level, should be passed along from the contract management system to the lease accounting application. AMENDMENTS AND RENEWALS If new schedules are added to a lease, the additional documentation should be captured and linked to the original master lease agreement in the contract management system. A similar process should be followed for lease renewals. The amended legal documents and lease schedules should be propagated along with any data abstracted from the contract management system. 42
SYSTEM #9 CONTRACT MANAGEMENT SYSTEMS EMBEDDED LEASES EMBEDDED LEASES Contract management systems store not only traditional leases, but also all types of service arrangements and outsourcing agreements. Under the new lease accounting standards, some of these service arrangements may contain embedded leases. Your lease accounting team will need visibility into contract manufacturing, data center operations, and other types of business process outsourcing arrangements to assess whether the underlying assets meet the definition of a lease. KEY CONSIDERATIONS Are lease arrangements typically stored in the contract management system? What types of documentation and data about leases is captured in the contract management system? How can lease accounting teams gain visibility into contracts that may contain embedded leases? 43
SYSTEM #9 CONTRACT MANAGEMENT SYSTEMS DATA FLOWS WITH LEASE ACCOUNTING 1 Following signature, master lease agreements, schedules, and other legal documents are stored in a contract management repository. Key terms are abstracted from the lease then shared with the lease accounting application. CONTRACT MANAGEMENT SYSTEMS New Leases ENTERPRISE LEASE ACCOUNTING Renewals and Buyouts 2 As new schedules are added, or when leases are renegotiated upon renewal, the new legal documents are uploaded into the contract management system then shared with the lease accounting system. 44
MASTER DATA
SYSTEM #10 MASTER DATA MANAGEMENT SYSTEMS Master data related to locations, people, and vendors changes regularly as well. You will need to ensure that master data is kept consistent between your ERP and your lease accounting application. LOCATION MASTER DATA The lease accounting application needs to have an accurate list of locations where right of use assets might be housed. Location master data for all of your office buildings, manufacturing plants, retail stores, data centers, call centers, and distribution centers should be synchronized between your ERP and lease accounting system. VENDOR MASTER DATA Leasing companies are categorized as vendors in your ERP, accounts payable, and procurement applications. Vendor master data for captive finance organizations, commercial banks, landlords, property owners, and other lessors should be synchronized between your ERP and lease accounting system. EMPLOYEE MASTER DATA Each lease should be associated with one or more employees in the lease accounting application. For example, when a periodic attestation of the asset s location or end of term plans is needed, there is a need to know who to contact. As a result, employee master data for individuals in operations, logistics, IT, fleet, treasury, and procurement may need to be synchronized. 46
SYSTEM #10- MASTER DATA MANAGEMENT SYSTEMS CHANGES TO FINANCIAL VARIABLES FINANCIAL VARIABLES The financial variables that underpin your accounting may change on a periodic basis. If these variables are not updated in your lease accounting system, then the journal entries being created in the sub ledger will be inaccurate. As a result, you will need to ensure that the cost centers, foreign exchange rates, and reporting areas being used by your ERP are in sync with your lease accounting application. Many of the financial variables needed to perform lease accounting may not be tracked in your ERP as master data. You will need to identify how information such as your debt weight, net income, total assets, total revenues, credit ratings, AMTs, and NOLs will be kept up-to-date in the lease accounting systems. KEY CONSIDERATIONS How frequently will you need to synchronize master data with your lease accounting application? How will financial variables that are not easily tracked in the ERP be updated in your lease accounting system? 47
SYSTEM #10 MASTER DATA MANAGEMENT DATA FLOWS WITH LEASE ACCOUNTING 1 As data about vendors, employees, and locations is changed, the ERP master data is updated. Changes are propagated to the lease accounting application on a periodic basis. MASTER DATA MANAGEMENT ENTERPRISE LEASE ACCOUNTING Master Data Financial Variables 2 As foreign exchange rates and cost centers change, and general ledger codes are updated, the corresponding variables are updated in the ERP. Changes are propagated to the lease accounting application on a periodic basis. 48
ALTERNATIVE APPROACHES
ALTERNATIVE APPROACH GET DATA FROM THE LEASING COMPANY GO TO THE SOURCE The ideal approach for obtaining the details about any new lease is to go directly to the source - the lessor. For equipment assets, that lessor might be a commercial bank, vendor captive, or independent leasing company. For real estate properties, the lessor might be a landlord or building owner. These leasing companies are also the single source of truth for most changes to leases as well. Whenever you sign a new real estate, IT, fleet, or equipment lease, the leasing company sends you electronic copies of documents such as the master lease agreement, schedules, and other addenda. However, you should also request that the leasing company provide a file with all the detailed data required for your lease accounting. The data might include schedule level details such as the commencement date, payment frequency, contract length, base/variable rent, and end of lease options. Schedules, assets, manufacturer name, product number, serial number, and ship-to location should be shared as well. These details could then be uploaded directly into your lease accounting application. 50
ALTERNATIVE APPROACH GET DATA FROM THE LEASING COMPANY CHANGES TO LEASES A similar process should occur whenever there is a change to a lease. Updates to variable rent schedules should be communicated directly from the leasing company. Expansions and contractions of real estate leases are best captured directly from the landlord. Swaps and upgrades of equipment assets are best captured directly from the vendor captive (or other lessor) financing the assets. Details of renewals and buyout agreements should come directly from the leasing company just as new leases do. Obtaining data directly from the leasing company provides a number of benefits. As the source of the data, files from the leasing company are least likely to contain mistakes. When data is manually abstracted from a lease by a procurement manager or contract analyst, there is a higher probability of error. Few leasing companies have sophisticated integration capabilities to support the scenarios outlined above. However, over the coming years, as the new standards take effect, there will be a significant increase in demand by customers for electronic data feeds. 51
TECHNOLOGY AND AUTOMATION
THREE LEVELS OF AUTOMATION There are several ways that your lease accounting application might interact with your other financial systems. These options range from fully automated to fully manual. Keep in mind that in some scenarios, the lease accounting system is the source of the data, but in other scenarios, it is the target. For example, the lease accounting system might be the source of inventory and depreciation data on right of use assets for the fixed asset management system. However, the lease accounting system typically consumes information from real estate applications. FULLY AUTOMATED SEMI AUTOMATED MANUAL PROCESS 53
FULLY AUTOMATED OPTIONS Your financial, asset management, supply chain, and master data management systems can be configured to periodically exchange data with the lease accounting application. The frequency of the updates might be monthly in the case of uploading journal entries to the GL, or daily in the case of recommended payment amounts to AP. APIs Application Program Interfaces (APIs) are the ideal option for fully automated exchange. However, not all lease accounting software vendors offer APIs, and not all corporate IT organizations will prefer to use APIs. An alternative is to schedule regular, batch transfers of files between your lease accounting application and other financial systems. AUTOMATED FILE TRANSFER File transfer offers a relatively high level of automation at a low cost. The appropriate fields can be extracted from the database of your general ledger, IT asset management system, or real estate system, and placed into a comma-delimited file. The file can then be uploaded into your lease accounting system. The process of extracting the data and uploading it can be fully automated so it occurs on a monthly, weekly, daily, or hourly basis. 54
SEMI AUTOMATED AND MANUAL OPTIONS SEMI-AUTOMATED FILE TRANSFER A semi-automated file transfer process is another option. On a daily, weekly, or monthly basis, an IT manager can run a script that extracts the appropriate data fields from your general ledger, IT asset management, or real estate system, and places them into a comma-delimited file. The IT manager can then run a second script that uploads the data into the target application. The reverse process can be followed for scenarios in which lease accounting is the target, rather than the source, of the data. MANUAL DATA ENTRY Another option is to swivel chair - reading data from one financial system and keying it into the other. For example, each new property lease may be keyed into your real estate administration system by the corporate real estate team and then subsequently keyed into your lease accounting application by your accounting team. Manual data exchange interface is the least efficient and most time consuming method for getting data in and out of your lease accounting system. It is also highly prone to error. 55
COMPARING OPTIONS There are pros and cons of each level of automation. Full automation offers the fastest information flow, lowest risk of error, and highest cost savings. However, full automation also requires the highest upfront investment to configure. Alternatively, a fully manual approach requires no upfront investment, but will slow down information flows and introduce opportunity for error. Most companies will not choose a single approach for how their lease accounting application will interface with other financial systems. Instead, a hybrid approach will be elected in which the right level of automation is selected for each interface. To evaluate which is the best option for each system, you should consider the following four factors. 01 BUSINESS IMPACTS What is the business impact of data becoming inaccurate, out-of-date, or incomplete? 02 COST SAVINGS What are the potential costs savings from automating the flow of data between systems? 03 IT BEST PRACTICES 04 What is the IT organization s preference and standardized approach to integrating financial systems? INFORMATION SECURITY What are the risks of unauthorized access to sensitive financial data that might be created through different technology options? 56
CONSIDERATION #1 BUSINESS IMPACT One factor that should influence the level of automation you elect is the potential business impact from human error. For example, suppose your general ledger was corrupted with duplicate journal entries from the lease accounting application. There could be a cascading impact of incorrect financial reporting on your income statement and balance sheet. Business processes that rely on a higher level of data quality are better candidates for automation than those with less material impacts. 57
CONSIDERATION #2 COST SAVINGS VOLUME OF DATA The opportunity for cost savings is another factor that may impact which level of automation is chosen. To perform a cost/benefit analysis, you should consider both the volume and velocity of data to be synchronized. HIGH VOLUME LOW VOLUME Processes with high volumes of data transfer will benefit from significant costs savings when automated. For example, suppose you have 10,000 leased IT assets, which have an average term of three years. The result will be 3000+ end of term events that might result in renewals, returns, buyouts, or new leases. If performed manually, you would need a small army of lease administrators to track these changes and hand-key the data into your lease accounting system. However, many of your leasing business processes may have relatively low volumes of changes. For example, your real estate team may only have a handful of sub-leases. With such a low volume, simply entering data into the web interface of your lease accounting application may be the best option for these types of changes. 58
CONSIDERATION #2 COST SAVINGS VELOCITY OF DATA Systems which need to exchange data more frequently (hourly, daily) are better candidates for automated data transfer than those with less time sensitivity (quarterly, semi-annually). HIGH VELOCITY LOW VELOCITY If you are a cloud computing provider that leases 10,000 data center assets, you may want to perform a weekly reconciliation between your IT asset management system and your lease accounting application to identify any discrepancies. Performing such a reconciliation weekly would require an army of lease administrators. Other business processes and data changes may have a much slower velocity. For example, changes to variable rent schedules may be stipulated in contracts to only occur once a year. A manual process may be the best option for maintaining variable rent schedules in the lease accounting system. 59
CONSIDERATION #3 IT BEST PRACTICES IT BEST PRACTICES It is likely that your IT organization has a preferred approach to exchanging data between various enterprise applications. Some companies may use a fully-automated approach for synchronizing data that leverages standardized APIs. Other companies may use file transfer technologies to regularly extract and upload records between applications. The enterprise architects within your IT organization will prefer to use the same approach to integrating your lease accounting application as is used with other systems. 60
CONSIDERATION #4 INFORMATION SECURITY INFORMATION SECURITY With cyber security incidents making front page news on a weekly basis, corporate IT organizations are implementing stronger controls for enterprise systems access. Therefore, the level of integration between your lease accounting software and other applications may be constrained by information security concerns. For example, your InfoSec team may not allow cloud-based applications outside the firewall to directly interact with sensitive financial systems such as your ERP. 61
SUMMARY AND RECOMMENDATIONS
DEFINE YOUR STRATEGY There are pros and cons to each technology option. Fully automated approaches such as APIs minimize business risk and cost, but take longer to implement. Manual data entry processes may be the best option for leasing information that changes infrequently or in low volume. Most companies will probably choose a mix of different technology options to keep your lease accounting data in sync with other financial systems. To define your strategy we recommend you: 1 2 3 4 Identify the key business processes that span across your lease accounting application and your financial, asset management, and supply chain systems. (See the reference chart on the following pages for a list of business processes and systems). For each system a. Identify the volume and velocity of leasing data that needs to be shared. b. Assess the business impacts and risks of potential errors. Rank the systems that would benefit the most from automated data exchange. Consult your IT organization about their enterprise architecture and information security preferences. After completing these steps you should be able to prioritize investments in automation between your lease accounting application and other financial systems. Consider engaging a Big Four firm or other consulting organization to help you perform the assessment and implementation. 63
SUMMARY - FINANCIAL SYSTEMS SUPPLY CHAIN SYSTEMS System Business Processes Critical Considerations Lease Accounting is Source/Target General Ledger Monthly financial close How will you route journal entries to Source multiple general ledgers? Will you post asset, schedule, or portfolio level debits and credits to the GL? How do you avoid duplicate posts and errors? Accounts Payable Expected payment schedule Actual invoiced expenses Actual disbursements How will you route transactions to multiple payment factories or shared service centers? Do you outsource accounts payable to a third party? Source Target Accounts Receivable Sub lease tenant collections Security deposits How will you aggregate transactions from multiple collections centers? Do you outsource accounts receivable to a third party? Target Fixed Asset Management Inventory management Depreciation expenses Which system should calculate depreciation expenses? Will you need to periodically reconcile the right of use asset list in both systems? Source 64