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ACCELERATING YOUR LEASE ACCOUNTING PROJECTTEN STRATEGIES TO CONSIDER

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Accelerating Your Lease Accounting Project 2

It’s 2017. And for many companies the lease accounting project that they only recently started is already behind. The new standards will require comparative income statement reporting for three years. That means that December 31st filers should have the processes, systems and controls in place already to be capturing all the lease accounting data needed for both the current and new standards in FY17.

But don’t panic! We estimate that 80% of Fortune 500 companies are behind schedule on their lease accounting projects. And for good reason. Implementation of the new revenue recognition rules, which has nearer term deadlines, continues to be the major focus for most companies. The gravitational pull of RevRec combined with the day-to-day demands of running the business are enough to prevent many Controllerships from devoting the attention and focus needed to ramp up their leasing initiative.

TEN STRATEGIES TO ACCELERATEYOUR LEASE ACCOUNTING PROJECT

The big question is this: what can you do to speed up the implementation process and reduce the risk of missing the upcoming deadlines? In this eBook we will share ten strategies you can take to accelerate different aspects of your lease accounting project. By applying one or more of these techniques, you may be able to shave weeks, if not months, from your timeline, potentially getting you back on schedule.

This guide provides short-cuts you can take throughout the lifecycle of the project. So whether you are just getting started orhave already started shopping for software, here are a few techniques to fast-track your implementation.



If you are just getting started on your lease accounting project, one of your first tasks should be to size and scope the overall work effort. Will this be a major accounting change project that is going to take a team of 10 people over 18 months to complete? Or will this be a minor administrative project that a small team can complete in 6 months. For lease accounting projects, the complexity will not necessarily correlate with the size of your company or your annual revenues. Instead, it will be a function of the complexity of your lease portfolio and the maturity – or immaturity – of the related processes. You will need to answer questions such as: How many different types of assets do you lease? How many stakeholders are involved with leasing? Where is your leasing data stored today? What is the quality of the data?

One quick way to get your arms around the complexity of your lease portfolio is to conduct an internal survey. Send out a simple 10 to 15 question web-based survey asking questions about the composition of your lease portfolio and the maturity of process, controls and systems. You will want to distribute the survey to the likely owners of leased assets such as operations, logistics, IT, real estate and fleet administration. And you will want to survey key corporate functions such as procurement, accounts payable, corporate treasury and lease administration. Be sure to list “Not sure” or “Unknown” as one of the potential answers to your questions. The responses to the survey will give you a sense for not only the sophistication of your leasing program, but also the level of challenge you can anticipate with the accounting change process.

1) READINESS ASSESSMENT

ACCELERATOR STRATEGY:

SURVEY THE BUSINESS UNITS



2) BUDGETING AND PLANNING

A key success factor in any project is obtaining the appropriate level of funding and resourcing to get the job done. But, estimating the work is still a guessing game for most large companies because there are relatively few companies that have implemented and therefore no benchmarks. How long will it take you to analyze each lease; capture the relevant data and perform the accounting policy elections and calculations? Guesstimates range from two hours per lease on the low end to eight hours on the high end. That is quite a broad range for companies with large lease portfolios. If you have 5000 leases your level of effort might be 10,000 hours or it might be 40,000 hours. In other words, a one-year project might take 5 FTEs or it might take 32 FTEs. Before going in front of the CFO to secure budget and resources you will need to obtain more precise estimates on the level of effort required for implementation.

How can you arrive at a more granular estimate of the time required per lease? We recommend taking a sampling of your leases and running them through the new accounting process: from contract to journal entry. For most companies, 25 to 50 leases will represent a good sample size. Have your project team review each of these leases; abstract the relevant data; and perform the accounting. To ensure an accurate sample, we recommend using a diverse collection of leases. A sample set with too much homogeneity could yield a misleading set of estimates. Instead, try to test leases from several different categories such as real estate, IT, fleet, marine, and material handling. Pick a few international leases that are written in a different language or based on a foreign currency. And try to test complex leases with multiple assets on a single schedule.

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TEST A SAMPLE OF LEASES



3) INVENTORYING YOUR LEASES

Most companies do not have a centralized list of all of their leases. A critical early step in your lease accounting project will be to conduct an enterprise-wide census of all your leases. For most companies, identifying the real estate lease population will be relatively painless. It is the remaining non-real estate leases that will be the key challenge. You will need to contact groups such as operations, logistics, supply chain, manufacturing and IT to identify all of the trucks, cars, forklifts, barges, rail cars, aircraft, computers and data center equipment leased across the business. You will also need to review any outsourcing and service contracts that may have “embedded leases” from an accounting standpoint.

The process of conducting an enterprise-wide lease census could take months. One quick approach to identifying all of your leases is to obtain a list of all recurring payments made across the business. Ask your Accounts Payable (A/P) teams for a report of all invoices that are being paid on a regular basis - whether monthly, quarterly, semi-annually or annually. If you have multiple A/P systems in different regions or business units you will need to collect data from all of them. You can search through the Payables report to identify vendors and payments that might be leases. In some cases you will need to inspect the individual line items on an invoice or view the associated purchase order. As necessary, you may need to contact the business owner that approves the invoice to obtain additional details on each lease.


FIND A PAYABLES REPORT



4) IDENTIFYING EMBEDDED LEASES

Another approach to conducting a census is to leverage specialized technologies that can automatically discover your leases by searching document repositories. Some vendors refer to the capability as spiders or bots while others describe themselves as contract analysis or lease identification. Regardless of the name, these “e-discovery” applications serve a common purpose. They will crawl through your contracts, much like the way the Google’s search engine does, to identify contract provisions and commercial terms typically found in a lease. You can even program these discovery technologies to identify potential embedded leases in other types of contracts.

Of course, an automated discovery approach will work best for companies that have most of their contracts stored on the corporate network and in a digitized format. Companies with leases scattered throughout file cabinets and employee hard drives will not benefit from this approach as much as those with centralized Contract Management Systems.

Check with your legal and IT team to determine if you have used these types of contract analysis and discovery technologies in any recent litigation, merger or acquisition activities. Some project teams may be surprised to learn that they already have access to these technologies today.


AUTOMATED DISCOVERY



5) DEFINING SOFTWARE REQUIREMENTS

Typically, the first step in a software selection process is to define a set of functional requirements for the application. Most people are still getting their head around the accounting changes required for the standard. Few have taken the time to research and understand the various software options available. Even the Big Four are climbing the learning curve to educate themselves on the software providers. And very little guidance has yet to be published by research analysts such as Gartner, IDC and Forrester.

How can you quickly assemble an RFP template that includes the key features that you will need to comply with the new accounting standards? A short-cut you may not have considered is using some of the marketing literature available from the lease accounting software vendors to jump start your requirements definition. A handful of vendors offer Evaluation Guides to compare the features and functions of lease accounting applications. Vendors design these guides to be used later in your buying cycle when you get to the step of narrowing down your “short list.” However, these evaluation tools can prove useful earlier in the process as well. Review these guides to understand what a lease accounting application can offer. Then pick and choose the features that are important to your selection process to include in an RFP.


USE VENDOR EVALUATION GUIDES



6) SELECTING SOFTWARE

Another way to quickly educate yourself about the features of a lease accounting application is to take a “test drive.” A handful of the cloud-based lease accounting providers offer 30-day free trials which you can enroll in online. Other providers will offer a longer, 90-day trial for a modest fee. The benefit of a trial is to quickly gain “hands-on” experience with lease accounting software. As a result, your requirements and selection process can be based on real-world activity rather than a theoretical view of what you think you might need.

Alternatively, you might conduct a 100-day “Rapid Results” project, in which you conduct the end-to-end lease accounting process for a segment of your portfolio, such as a particular business unit. The Rapid Results project will not only provide you insights into the benefits of lease accounting software, but it will provide you real world insights into the challenges with lease accounting. You can quickly identify where the bottlenecks with the implementation are and what issues pose the greatest risks to success. Upon completion the team that conducted the Rapid Results initiative can then serve as the company experts, training and enabling the other business units over the life of the project.


CONDUCT A PAID OR FREE TRIAL OF THE SOFTWARE



7) FINDING DATA SOURCESPerhaps, the most challenging aspect of any project will be collecting the necessary documentation and data for each asset being leased. You may need to record over 100 different variables for each lease to support any assumptions, judgments or calculations performed during the accounting process. The challenge that most companies face is that there is no centralized database or enterprise application for tracking all the leases and leased assets across the business. Information about real estate leases is typically housed in a real estate administration system. However, data elements for IT, vehicle and other equipment leases are typically scattered across the business in spreadsheets, file cabinets and contract management repositories. Much of it is stored in paper or image format, not easily uploaded to a database.

One way to accelerate your approach to collecting the data is to simply request copies of the documentation from your leasing companies. Send each of your lessors a note requesting copies of Master Lease Agreements and schedules. You can make the request during an upcoming payment cycle as a routine audit request needed for invoice approval. Or you could communicate that you are reconciling different sources of data as part of your lease accounting compliance project. Most equipment lessors can easily pull leasing details such as asset description and location; fixed and variable rents; buyout, renewal and return options for any particular customer with just a few mouse clicks. Similarly, real estate landlords easily can provide the base and variable rents, Common Area Maintenance charges, termination and expansion classes for any current leases.


ASK YOUR LEASING COMPANIES AND LANDLORDS



8) CAPTURING LEASE ACCOUNTING DATAAs you assemble the documents, you will need to begin collecting contract-level and asset-level details into a centralized repository. Some of the information about your leases will be stored in a database or other enterprise application such as your real estate system. Other information about your leases will be stored in the original documents such as the Master Lease Agreement and lease schedules. These documents may have been scanned into an image or a PDF. Others may exist only on paper. Each of these documents will need to be inspected to identify the relevant data items. Then each piece of information will need to be keyed into your lease accounting system. This manual data entry approach is not only time-consuming; it is error-prone as well.

A faster approach to collecting the needed information is to use “data abstraction” technologies. Using Optical Character Recognition (OCR), data abstraction software can scan an image, then convert it into text format. Natural language processing capabilities are applied to the converted text documents to identify the lease key terms and conditions which need to be captured for accounting. The lease terms are then presented to a human analyst who validates the abstracted data. Then, artificial intelligence algorithms, called “machine learning,” watch and learn the corrections made by the human analyst so the next time the same correction is required, the machine can make the correction itself, saving the analyst time.


DATA ABSTRACTION TECHNOLOGIES



9) UPLOADING TO THE STAGING DATABASE

A software trial can also help you to accelerate your data collection efforts, especially if you take a non-linear approach to the project implementation. Most companies will go through a normal, linear process of defining requirements and selecting a software vendor first and then begin the effort to collect the data. But for lease accounting projects the data collection process represents the largest work effort and highest potential risk. You can reduce the risk and accelerate your project schedule by conducting the data collection and software selection process in parallel.

Sign up for a trial with an application that you think might end up on your short list of possible providers then begin the process of collecting your data. You can house the information you gather about lease payments, residual values and end-of-term options in the trial system for 90 days while you are evaluating software options. By the time you reach a decision on software, you will have gained a three-month head start on the data collection process.

Of course, this strategy gets a bit tricky if you decide to go with a different software application than the one you used for the trial. The vendors offer these trial periods with the hopes that you will fall in love with their software and convert to a long-term customer. Be sure to carefully review the vendor’s policy on data ownership prior to enrolling in any trial. If you choose to go with a different software package you will want to ensure that you can easily export the data you have collected in the trial system and transfer it to another application.


USE YOUR TRIAL SYSTEM AS A STAGING DATABASE



10) INSTALLING AND CONFIGURING SOFTWARE

Using a Software-as-a-Service (SaaS) model rather than deploying the lease accounting application in your own data center, may be a way to shave additional time off the project schedule. Some Corporate IT organizations prefer all of their business applications to run “behind the firewall,” managed by in-house teams. However, CIOs at large companies are increasingly turning to SaaS models, even for mission critical applications.

With a SaaS model, there is no need to procure server hardware, storage devices and database licenses. There is no need to invest the time required to learn how to install and configure the application. And there is no need to spend time setting up security, backup and monitoring systems to perform the day-to-day administration of the application. In a SaaS model, the software vendor takes on all of these responsibilities as part of the subscription.

If your corporate IT organization is like most, there are many more projects that the business wants to pursue than there are available resources to implement. As a result, your lease accounting project may have to “get in line” along with all the other critical revenue generating and post-merger integration initiatives. While SaaS certainly does not eliminate the need for IT participation in the project, it can reduce contention for critical IT personnel in the data center operations and financial systems teams.


SOFTWARE-AS-A-SERVICE APPLICATIONS

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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.

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ACCELERATING YOUR LEASE ACCOUNTING PROJECTexplore.leaseaccelerator.com/wp-content/uploads/... · Accelerating Your Lease Accounting Project 2 It’s 2017. And for many companies the