By now, public companies have adopted the new lease accounting standards, IFRS 16 and ASC 842, as required on January 1, 2019.
However, given the sprint toward compliance due to more challenging than anticipated revenue recognition projects, more than a few public companies were likely rushed into solution selection and went into first quarter of 2019 reporting with a leasing solution that used plenty of workarounds.
Now with a year of reporting under the new standard behind them, many public companies are unhappy with the capabilities – and limitations – of their leasing solutions. PwC summarized findings from a recent survey stating, “disappointment around initial lease accounting software solution selections was widespread. Executives noted that starting the vendor selection process earlier would have afforded them the opportunity to better tailor the lease accounting systems to their business needs and budget. (source)
Below we outline five of the most common reasons companies are dissatisfied with the solution they have in place.
The solution does not provide lessor functionality
Many leasing solution vendors only provide lessee support for the new standards. This forced some companies to handle their lessee and lessor accounting in different solutions. Advisories expect organizations who took this approach will look to consolidate systems if possible.
To appropriately account for lessor obligations, companies must consider the revenue recognition standards (IFRS 15 and ASC 606) as well as the leasing standards and comply with both in the appropriate manner.
For example, an industry like hi-tech manufacturing may lease high-dollar hardware items alongside line items that must be recognized under ASC 606 and/or IFRS 15. To comply, transaction prices must be allocated to non-lease items based on revenue recognition policy and then the leasing line items must be accounted for correctly under ASC 842 / IFRS 16 before the journal entries can be created. For companies that implemented revenue recognition and leasing solutions that don’t ‘talk’ to each other, this can mean significant manual intervention to satisfy compliance requirements.
For one of our clients, it was the approximately 2,500 property subleases that presented a significant obstacle, since subleases require lessor accounting. Before choosing Aptitude, they eliminated six vendors on the grounds that they could not support their requirements around subleases. But many organizations that didn’t have the patience or the lead time to conduct such a thorough evaluation ended up disappointed with the workarounds or manual effort required to address lessor accounting in a solution built for lessees.
The solution doesn’t support the required disclosures and management reporting.
Reporting is a critical aspect to compliance but there are a few ways that lease solutions can fall short in this area.
First, the lease data is not generated at a granular enough level. If the solution is not able to source and store data points at the individual asset level due to volume or other restrictions, it can be more challenging to generate the required disclosure reports.
Second, a solution may lack built-in disclosure reports, which incorporate best practices in lease accounting. The organization then needs to have both the expertise and resources to configure the appropriate business rules and events to generate compliant accounting. On the flip side, challenges can also arise when a solution contains canned reports, but they are too rigid and cannot be configured to support an organization’s unique business processes.
Finally, if a solution requires significant manual interventions or complex maneuvering, it will sap time and energy from your people and limit their ability to analyze data and mine for insights. Required disclosure reporting is critical but it’s when your team can move beyond the requirements to begin to use lease data to understand the impact of exercising options at different times, making lease versus buy decisions or the profitability of a new business model that adds value.
The solution lacks required controls
Given the rush to compliance, many organizations created excel-based solutions to check the compliance box before the deadline. Now these companies are back on the market looking for a tool that will provide greater automation and accuracy.
Other companies implemented lease administration systems which were retrofitted to address the standards and may lack key accounting-based capabilities and fall short of the requirements of a truly controlled environment.
With the number of judgments allowed by the standard, strong controls are needed to ensure consistency of accounting applications including how the company is:
- centralizing lease data
- evaluating what is considered a lease
- measuring the new right-of-use asset and lease liability
- sourcing lease data
- parsing lease and non-lease items within a contract
- establishing an incremental borrowing rate
- estimating CPI or other index–related increases
Without the mechanisms to consistently apply accounting and then explain it to regulators, businesses may have trouble during the audit process. Strong process controls around version management, workflow controls, and error management can protect the organization.
The solution struggles with complex leases
The reality is, for most organizations, multi-entity, multi-currency leases abound. Complex arrangements like embedded leases and leases with multiple components can increase data volumes and system requirements. Multiple GAAPs, currencies, calendars and lease arrangements require solutions that can manage the required calculations, accounting and reporting that they necessitate.
Even if the majority of your leases and lease volumes are manageable now, new business models will continue to arise and give way to new leasing models. Recently the emergence of COVID-19 served as the ultimate example of unplanned market disruption. Given the economic impact of the virus and the global slow down, rent concessions skyrocketed impacting various aspects of a company’s lease accounting including impairment of a lessee’s ROU assets and lessor’s owned assets held out for lease, abandonment of ROU assets, lessee discount rates and re–assessments, fair values, and more.
Those organizations that can more easily accommodate lease modifications, business model changes, and market disruptions – and forecast the impact of those changes on the bottom line – are at a competitive advantage.
You’re not seeing any additional business value
Ideally, any solution that addresses IFRS 16 and ASC 842 will also help facilitate better business decision making. You should expect your leasing solution to give you a complete, holistic view of your lease portfolio. It should allow you to not only model different scenarios but also flexibly respond to the changes in your business over time. Think of all the things that will likely change in the coming years. Will you need to expand into new countries? New products? New business models? If you don’t feel like your current lease accounting solution can grow with your business, it may be a sign that it’s not for the long term. The ideal scenario was articulated by Accounting Today: “empowered by the centralized data from the lease accounting software, accounting professionals are positioned to add valuable insights on lease spend, advise on both operational and financial decision and provide more in-depth and accurate financial analysis.” (Accounting Today)
More importantly, less than comprehensive solutions are not helping finance departments shift toward the fast, efficient, real-time reporting they are striving for. They lack the flexibility to accommodate new business models and company growth and fall short of the automation required to drive cost savings and increased efficiencies.
If you would like to hear more about the Aptitude Lease Accounting Engine, and how we can help you achieve value beyond compliance – email us at Info@aptitudesoftware.com