Since the start of my career as an accountant, spreadsheets have always seemed to be my best friend when it came time to tackle business issues that require agile modeling and quick turnaround. The flexibility that a spreadsheet offers is fairly compelling, so it’s no wonder that it’s the first solution that comes to mind when thinking of complex calculations. It’s also no surprise that businesses have been looking at spreadsheet solutions for transitioning to the new lease standards. That of course begs the question: Are spreadsheets truly up to the task of tackling lease compliance (IFRS 16 and ASC 842) for the enterprise?
What are the complexities?
With many leases moving onto the balance sheet, the new standards present a real challenge in terms of data centralization and lease portfolio visibility. To timely and effectively meet the accounting and audit requirements for leasing, contract data will need to be unified in one single repository so that classification of rational, measurement, transitional accounting decisions can be accurately substantiated.
The reality is that businesses are currently storing a significant portion of their lease data in filing cabinets and other dispersed systems. A considerable effort will be required to gather the necessary lease information from these dispersed systems, including paper documents. However, how would you ensure that the data collected can be traced to the source document?
In addition to the issues surrounding data complexity, the new standard requires extensive disclosures to be added in both financial statements and notes. Along with more qualitative and quantitative disclosures, the new standard requires, among other things, lessees to disclose the variable lease costs that are not part of lease components, short-term lease costs, and low-value asset lease costs (IFRS).
In preparation to apply this new standard, many businesses will want to account for leases in parallel to fully grasp the impact on their financial statement and at the same time, help with the retrospective application of the standard.
Why do spreadsheets fall short?
The regulations were not only created to require businesses to report the leases differently, but also to manage their leases differently. Businesses will need to be extremely coordinated in their lease management and reporting efforts.
While modeling is the forte of spreadsheets, data management, tracking, collaboration, auditability, and integration are significant weak points. In brief, a spreadsheet will not be able to manage your lease data or bring visibility to your lease portfolio easily across your enterprise. These significant downsides require businesses to find additional solutions to fill gaps in functionality. The gaps will end up being filled with either intensive manual processes or other custom solutions that cover the lease management lifecycle, reporting, and auditing needs of the regulations.
If there is one phrase business leaders don’t like hearing, it’s “we should develop a custom solution.” Building and launching a custom in-house solution will prove to be a significant challenge for businesses already undergoing a transition to the new lease standard. And that approach will likely cause nightmares for the accounting experts who have already been deployed onto the lease compliance project.
The time crunch
For many businesses, some level of dual-reporting will begin as early as Q1 of 2017. This puts CFOs who have not progressed far into their compliance projects into a situation where they need to enable processes and training while simultaneously sourcing a solution.
What kind of solutions should be considered?
There are many lease management solutions available with a multitude of capabilities. But businesses looking for a product that scales with their business and their processes will need to look at one that integrates with their existing financial systems, unifies all sources of leasing data into a single repository, and supports the adoption of the new standards.
The right solution should also help ensure traceability for compliant reporting and offer complete visibility into the changes and decisions made during the entire data collection, assessment, and accounting processes.
Buyer beware, however, as most leasing solutions are unable to offer compliance, lease accounting, lease management, reporting, and integration all in a single package. Solutions based on other core purposes like real estate management, for example, will allow you to manage your real estate leases, but may fall short in managing more logistically complex equipment leases.
Businesses with large amounts of leases or a complex lease portfolio should look at an enterprise-tier solution that can cover all the bases.
For more information, please listen to the replay of our recent webinar.