By now, most public companies have adopted the new lease accounting standards as required on Jan. 1, 2019. However, given the rush toward compliance – in a Q4 2018 survey only 4% of public companies had reported completing their leasing implementations – more than a few public companies likely went into first quarter reporting with a solution that used plenty of workarounds.
So, what are the signs your lease accounting solution is not going to work for the long term?
Your spreadsheet solution can’t take much more:
In the above cited PWC survey, almost a quarter of public companies reported the intention to use a desktop application, including spreadsheets, to achieve leasing compliance. Yes, it’s true that some organizations with simple lease structures or a low lease volume will be able to manage with Excel. However, several public companies likely found this to be challenging during 2019 first quarter reporting. Excel is notorious for lacking flexibility, financial controls and of course, automation. Implementation of the standard will have a significant impact on the balance sheet, income statement and other key finance KPIs, so it’s important that those figures can be explained and supported. This requirement will be difficult to satisfy using spreadsheets.
Your solution struggles with complex leases
You know the easy ones. The leases with two parties, no complex arrangements, no options to exercise, and no variable rates. If only all leases were structured that way. But 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. If your solution can’t support your complex lease types, it may be time to look elsewhere.
Your lease accounting solution is taking – not giving – time and resources
If your solution requires significant manual processes and interventions, it’s likely sucking precious time from you and your team. Automation, whether in the form of integrating and standardizing lease data, generating calculations, producing Multi-GAAP reporting or applying the right accounting logic to complex lease types will save your team time and reduce the risk of errors. Likewise, if the solution you are currently using requires significant customization and lacks built-in IP in the form of accounting rules and templates, your team will pay the price.
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 recently 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)
Auditors are asking questions:
The nature of the changes required by the new lease accounting standard mean they impact some of the most critical KPIs your business reports. Additionally, the judgments required by the new standard, such as the measures for what is considered a lease and the way in which the company will measure the new right-of-use asset and lease liability, will require support and explanation as well. If you can’t explain the approach you took and why the balance sheet figures have moved, then you’ll have trouble during the audit process, and no one wants that.
If any of these signs sound familiar, your lease accounting compliance solution may not be fit for the needs of your company. The Aptitude Lease Accounting Engine (ALAE) is a pre-packaged & purpose-built lease accounting solution, delivering IFRS 16 and ASC 842 compliance and core lease management capabilities, for the most complex leasing requirements.