7 Lessons Learned from Lease Accounting Project …...SEVEN LESSONS LEARNED FROM LEASE ACCOUNTING PROJECTS 05 Expect to get pushback from the other organizations. Collecting all the

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LESSONS LEARNED FROM EARLYIMPLEMENTATION EFFORTS

To answer this question, we compiled notes from discussions with over 200 large organizations during the past year to arrive at a list of the Top Seven Lessons Learned from Early Implementation Efforts.

We hope you find it helpful!

As the deadline for the new lease accounting standards gets closer and closer, more companies are starting up projects with accelerated time frames. Operating on a tight schedule, these organizations cannot afford to make first-timer mistakes during the implementation. One of the most common questions we get asked is: “Based on your experiences with other clients, what lessons learned can you share about implementation for the new standards?”

SEVEN LESSONS LEARNED FROM LEASE ACCOUNTING PROJECTS www.leaseaccelerator.com 01

01 GET IN FRONT OFTHE BUDGET CYCLE


Many of the companies we have spoken with have either missed the budgeting window for the year or submitted a budget that was too low. Budgeting for lease accounting is largely dependent on the scale and complexity of the organization's leasing program, so it’s difficult to establish a benchmark. However, you can estimate the cost by developing a bottom-up budget that models the two major incremental costs.

The first cost relates to any consultants or technology you may need to identify your leases and abstract the necessary data. The time estimate can be calculated by multiplying the number of leases by the time required to process each lease. Guesstimates range from two to eight hours per lease to abstract, analyze, and cleanse the data. To arrive at a realistic estimate for your business, we recommend taking a sampling of your leases and running it through the data collection process. Processing the sample will provide you with a realistic per-lease cost to collect the data.

The second major expense is the licensing and implementation of a lease accounting software application. If you are thinking of an on-premise application (versus the cloud), do not forget to model the associated server hardware, data center, and hosting fees. There will also be costs related to installing, customizing, integrating, and testing the software. Consider participating in either a 30-Day free trial or a 100-Day rapid results project offered by a software vendor. Both of these programs will offer you real-world insights into the costs and requirements for implementing lease accounting software.


Once you arrive at a cost estimate, the hard work begins. You will need to sell the CFO, audit committee, and other decision-makers on the need for an adequate budget. Do not expect that the decision makers will be familiar with the leasing portfolio and the associated business processes. Although leasing is a critical part of the business, it is rarely viewed as a standalone process. Instead, leasing is viewed as a financing instrument that supports business processes such as real estate, corporate IT, and operations. Therefore, you will need to educate the decision-makers on the leasing program, including its size and scope; its role in key business processes, and its complexity. Then you will need to explain the significant effort that will be required to identify the population of leases, collect the necessary data, and implement the new software.

Be prepared to do some selling on the goal of the new standards and the value of the project. More ambitious project teams are thinking beyond just compliance with the new reporting requirements to generating efficiencies from better lease administration. The business benefits when processes such as lease-versus-buy, end-of-term equipment returns, and KPI scorecards are standardized.

Recommendations:Ask the revenue recognition team about their experience with budgeting. How did the original budget compare to the actual dollars required for completion? Leverage the answers as a case study. Consider talking about the benefits to be gained from operational improvements with non-real estate leases. Software vendors and consulting firms can help here with real-world case studies from other companies.

02 YOU WILL NEED TOSELL THE BUSINESS

A similar dependency exists for day two. Significant changes will be required to establish the appropriate processes, policies, and controls to keep lease accounting accurate on an ongoing basis. Again, these changes will impact not only accounting, but also corporate functions and business units.

Accounting will need to be notified of new leasing contracts and changes to leases as they flow through Procurement, Treasury, and Legal teams. Real Estate, Corporate IT, and Operations teams will need to notify Accounting of situations that may trigger a remeasurement or modification. Examples might include changes to the reasonably certain holding period of end-of-term plans.

Historically, most accounting-changes projects have been managed within the four walls of the accounting organization. However, the new leasing standard is different. The accounting team will be critically dependent upon the rest of the business to help identify all of the leases and capture the required data. Corporate functions such as Procurement, Treasury, and Accounts Payable will play a significant role in finding leasing data. The actual users of leased assets such as Real Estate, Corporate IT, Operations, and Logistics in various business units will need to play a major role as well. And that is just for day one compliance.



Expect to get pushback from the other organizations. Collecting all the leases across the business is a time-consuming process that might lead other teams to ask, “What’s in it for me?” You may even need to sell back your peers in regional finance organizations around the globe. These local organizations will likely have their own set of priorities beyond what is important to headquarters. Success will require not only participation, but also leadership from other teams in certain case. For example, a common issue that many companies are wrestling with is ownership of non-real estate leases such as IT, fleet, and material handling. At many organizations a variety of different groups use these leases. And there is no clear owner. Finding someone to volunteer may be a challenge.

Recommendations:Get your executive sponsor involved to help champion the initiative with the other organizations. Start with the groups that report to the CFO such as Procurement, Treasury, Accounts Payable, and Real Estate,

03 AVOID HAVING TO TAKEA SECOND PASS AT DATA COLLECTION

One of the most time-consuming aspects of implementing the new standards will be collecting the data necessary to perform the accounting. Most companies will have to embark on a scavenger hunt to find their leases. You will need to contact groups such as Real Estate, Operations, Logistics, Supply Chain, Manufacturing, and IT to identify all of the buildings, trucks, cars, forklifts, barges, rail cars, aircraft, computers, and other assets leased across the business. For each lease, you may need to record over 100 different variables including base and variable rents; payment frequency and timing; and buyout, renewal, and return options.

Make no mistake, data collection will be a painful process! And that is all the more reason to be sure that you don’t have to do it twice. Many companies discovered that they approached data collection the wrong way on the first pass. And now they have to do a second pass to review many of their leases.



One mistake many companies have made is working from the wrong versions of lease contracts. During their term, leases can be modified and new schedules can be attached. Leases might even be renewed under different terms. Validate that you have the latest version of the contract with the most recent schedules and amendments. Otherwise, you may be making judgments on an outdated set of payments, terms, and lease clauses. There are two ways to confirm that you are working from the right version of the lease. One approach is to check that the invoices/payments being processed in the AP system match the contract. Another option is to request the latest version of the lease documents directly from the lessor. Another common mistake is attempting to collect all the data before selecting a software vendor. Instinctively, such an approach might make sense. However, the choice of software vendor and the data required are somewhat interdependent. Each vendor may have a slightly different list of inputs required for managing and accounting. Once you have selected a software vendor you can work from the definitive list. The alternative is to risk requiring a second pass at the data collection process.

Recommendations:Always confirm you have the most recent version of a lease. Match the version of the lease contracts you are reviewing with the payments being made from Accounts Payable. Request the latest copy of the master lease agreement and schedules from the lessor. Select a software vendor before conducting the bulk of your data collection. The software vendor can provide the definitive list of fields required to successfully perform the accounting.

04 NOT ALL THE DATA IS ONTHE LEASE OR IN THE SYSTEM

Don’t assume that once you have found the lease contract that the data collection process is complete. While two-thirds of the data required to perform the accounting will be on the actual master lease agreements and schedules, the other third will not. The leasing contracts are a good source of information on terms, rents, payment frequency, and end-of-term options. However, you will need to go “off lease” to discover physical locations for material handling assets, renewal plans for office buildings, and residual value expectations for vehicle fleets.

Don’t assume that the full set of information you need to perform the accounting on property leases is in your existing real estate administration system. Many companies have over-estimated the quantity and quality of the leasing data being tracked in their corporate systems today. While the real estate administration system acts as the system of record for all property leases, it may not have everything needed for accounting. There are several reasons why.

Today’s real estate administration applications have powerful capabilities – especially when it comes to integrated workplace management systems. However, not all companies take advantage of the functionality offered in these applications. Don’t be surprised if your real estate administration application is being used primarily as a contract repository to simply house leasing agreements. In these cases, the data about the leases may be inaccurate, out-of-date, or incomplete.



International leases are problematic as well. Many companies we have spoken with do not have a real estate system for international leases. Others have multiple international systems that are fragmented or poorly maintained. As a result, a time-consuming process will be required to reconcile systems and data.

Those leases not in the system will have to be reviewed to abstract the data. For leases written in local languages and local currencies, the regional team may need to abstract the data. Or, the leases will need to be translated into a common language for review by the headquarters staff.

But even the most well-run real estate organizations who are leveraging the strength of an integrated workplace management system may not be tracking all the data needed for lease accounting. Why? Because there may never have been a business need to capture some of the information needed for the new standard. Reasonably certain holding periods for buildings and expected end-of-lease options (renewal, expand, contract) are unlikely to be documented in any system. Similarly, accounting data such as economic life, amortization period, and incremental borrowing rates for these real estate assets are unlikely to be captured in a real estate administration application.

Recommendations:Early in the process conduct an audit of the data in your real estate systems for a sampling of leases. Confirm that the data fields not only exist, but also match the information on the corresponding contracts. Plan to have a real estate leasing expert on your project team. Assume that you will need to perform abstraction and analysis of a subset of your real estate leases even if they are already loaded into a system.

05 THE DATA COLLECTIONPROCESS IS NEVER-ENDING

The scope and scale of the data collection effort required for lease accounting is significant, especially within the time constraints required to meet the deadlines. As a result, many project teams are leveraging outside help and advanced technologies to get the job done. However, it is important to remember that your in-house accounting team ultimately is responsible for the accuracy of the financial reporting and the underlying data.

Although you may be leaning on consulting organizations to help capture all the data, your team will still need to perform quality assurance to confirm its accuracy. Data abstraction technologies can provide a shortcut to collecting key lease variables. However, the accuracy of these machine learning tools needs to be verified by a real person. Plan to audit samples of the data after the collection process is finished to ensure its accuracy and completeness.



Recommendations:Devise a quality assurance strategy to ensure that data being abstracted by software and consultants is verified in part or in whole. Set expectations with other departments up front. Ask the teams providing the data for a longer-term point of contact that can help with capturing new leases and modifications to existing ones.

Also, don’t forget that leasing data is changing while you are collecting it. Consider a company that has 1000 leases across the enterprise. With an average term of 48 months, this organization might have a turnover of 25% or more of its leases every year. New leases will be signed. Existing leases will be renewed (and changed) or terminated. During a six-month project to collect the data on 1000 leases, the data for 125 of them is likely to change. Plan to review changes to leases after the data collection process is complete to check for modifications, reassessments, and removals from the portfolio.

And the data collection process will continue after the implementation date. Forward-thinking project teams will design processes not only to collect the data needed for day one, but also to institutionalize processes for day two and beyond. Business processes will need to be established to account for new leases, end-of-term decisions, and midterm modifications. Owners for data collection, data quality, and data attestation will need to be appointed. System interfaces to keep the lease accounting application up-to-date will need to be developed.

06 KNOW YOUR BUYINGPROCESS FOR SOFTWARE


Before you start, map out the buying process for software at your company. While this may sound obvious, we have encountered numerous companies whose software selection process has been delayed because they did not involve all the necessary groups up front. Understand whether the software selection is to be made by Accounting, IT, or an executive selection committee, then engage the appropriate stakeholders.

When selecting software the groups that need to participate in the selection process may vary depending upon your strategy. For example, if you are planning to add a module onto your integrated workplace management system, your corporate real estate groups will need to be involved. If you are implementing lease administration for non-real estate assets then you may need to involve Operations, Logistics, Fleet Management, Corporate IT, or other business units. Be sure that all influencers have an opportunity to see a demo of the software, submit requirements for the RFP, and ask questions about the implementation.


Remember that ultimately you are buying software, which means that the IT organization will play a critical role, if not act as the final decision maker. Understand the preferences your IT organization may have related to the cloud, information security, and technical support. Also, be sure to ask about the IT team’s satisfaction level with your existing ERP, asset management, and real estate vendors. You don’t want to march down the path assuming you will build upon one of your existing vendors only to find out that IT has found the application a nightmare to support.

Finally, do not underestimate the importance of information security. With cyberattacks and ransomware making front page news daily, your IT organization will need to perform diligently on all vendors, especially those with sensitive supplier contracts and financial information.

Recommendations:Ask the revenue recognition team about their software evaluation and selection process. What were the pitfalls and obstacles to avoid? What would they do differently if they had the chance to go through the buying process again? Budget time for information security reviews if you are considering software-as-a-service applications. Your compliance team will likely want vendors to respond to questionnaires and participate in phone interviews before they will sign off.

07 MANY SOFTWAREVENDORS ARE NOT READY


Don’t assume that just because a vendor offers lease accounting software that it actually works. Although the lease accounting standards have been out for several years, many vendors still have not added advanced lease accounting and management features to their software. As a result, these vendors may not be able to support complex lease portfolios.

Data abstraction technologies available for lease analysis are still climbing the learning curve as well. The quality of the machine learning process used by these abstraction algorithms is only as good as the number of leases that have been processed.


Ask vendors the tough questions to find out how mature their software product really is. You will need to go deeper than, “Does your application support ASC 842?” Although this is a common question we see on RFPs, it does not allow you to effectively evaluate the capabilities of a vendor. Ask more detailed questions about the features for lease policy and classification, journal entry extraction and GL upload, and roll forward reporting and reconciliation. Send vendors a sample of leases to upload into the system. Talk to references that are already using the product. Request contractual commitments for product roadmap features.

Remember that the new standards are new not only for companies filing financial disclosures, but for the technology vendors and consulting organizations as well. Ultimately, you may need to approach your vendor selection process in an unconventional way by comparing the risks and tradeoffs of different approaches.

Recommendations:Consider vendors that offered lease accounting functionality prior to the release of the new standards, ASC 842 and IFRS 16. These vendors will have a more mature product that has been quality tested over many years. Have a Plan B for lease accounting software just in case your vendor does not come through. Map out a process for how you can quickly extract your data from the Plan A system and get it into the Plan B system.

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LeaseAccelerator offers the market-leading SaaS solution for Enterprise Lease Accounting, enabling compliance with current and new FASB and IASB

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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7 Lessons Learned from Lease Accounting Project …...SEVEN LESSONS LEARNED FROM LEASE ACCOUNTING PROJECTS 05 Expect to get pushback from the other organizations. Collecting all the