a five step approach for cfos - leaseaccelerator · a five step approach for cfos ... equipment...

A Five Step Approach for CFOsA Five Step Approach for CFOsTo Understand the Impact of theNew Lease Accounting Standards

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CONT

ENTS

The Biggest Challenges CFOs Will Face www.leaseaccelerator.com

DO I HAVE A PROBLEM? 01Why The New Standards? 02

What Is Changing? 03

How Will You Be Impacted? 04

WHERE (SPECIFICALLY) IS THE PROBLEM? 05

Real Estate and Equipment 06

Real Estate Versus Equipment Leases 07

WHAT IS THE ROOT CAUSE OF THE PROBLEM? 08

Equipment Data Is The Big Challenge 09

The Blind Side 10

HOW DO I SOLVE THE PROBLEM? 11

ERP Systems – Mind The Gaaps 12

Automate Your Business Processes 13

Quality Data Is The Key To Success 14

WHAT IS THE ROI OF SOLVING THE PROBLEM? 15

How To Save Money And Comply 16

Five Steps To Understand The Impact 17

When Is The Lease Accounting Deadline? 18

About LeaseAccelerator 19

DO I HAVE A PROBLEM?

The Biggest Challenges CFOs Will Face www.leaseaccelerator.com 01

01

WHY THE NEW STANDARDS?


Greater VisibilityInto Debt ObligationsRemember Enron? The executives of Enron used various accounting “tricks” to hide liabilities. When Enron failed, the SEC investigated the area of off-balance sheet financings. What they found was a giant loophole that presented substantial risk to investors in the area of operating leases.

The SEC determined that these lease obligations should have greater transparency and visibility in public financial reports. Over the past 15 years, both FASB and IASB have worked to develop new lease accounting standards that promote greater transparency.

With the new lease accounting standards, all leases longer than 12 months will be capitalized, while assets and liabilities will be reported on the lessee’s balance sheet.

As a result, lease payments will be turned into a lump-sum liability. The effect will be increased debt ratios that could potentially bust bank covenants.

The good news is that new lease accounting standards will provide greater visibility into a firm’s indebtedness. But they will also result in increased audit scrutiny.


Lease Obligations Pushed to the Balance Sheet

WHAT IS CHANGING?

“The biggest-ever accounting change”

In reference to the new lease accounting standards

PWC

to comply with the new standards.

If your company has a large lease obligation, especially a large equipment lease obligation, then read further. The new lease accounting standards will become an important issue for your firm moving forward.


Which Firms Facethe Most Risk?Firms with Large Operating Lease Portfolios

Companies with a significant number of operating leases will be impacted the most by the new lease accounting standards.

Why? Because they do not have the:

HOW WILL YOU BE IMPACTED?

The size of your lease obligation will

determine if the new lease accounting

standards are material to your company.

DataContracts Processes Systems

02


WHERE (SPECIFICALLY) IS THE PROBLEM?

?

Real Estate leases cover large assets such as buildings, plants and facilities. These leases are generally big in dollar value, but small in number. Real estate leases are long-term and the assets do not tend to move.

As a result, most companies have an organized system of record for managing their real estate lease portfolio. Most experts do not expect accounting for real estate leases to be a major compliance challenge under the new standard.


Real Estate Leases Equipment LeasesEquipment leases typically cover many small, movable assets, such as cars, trucks, forklifts and computers. Most companies have a large number of equipment leases with relatively lower dollar value. The leases have shorter terms, but are complicated by the fact that the equipment can be moved both physically and logically (between cost centers)

The complexity and risk is much greater with equipment leases than with real estate leases.

REAL ESTATE VERSUS EQUIPMENT LEASES


REAL ESTATE VERSUS EQUIPMENT LEASES

RealEstateLeases Big Small Few

Centralized,Organized

EquipmentLeases

Dollar Value Number ofContracts Stakeholders Processes and

Controls

Big ManyDecentralized,Disorganized

Dollar Value Number ofContracts Stakeholders Processes and

Controls

Small

03WHAT IS THE ROOT

CAUSE OF THE PROBLEM?


EQUIPMENT DATA IS THE BIG CHALLENGE


The quality of data for equipment leases in most firms is abysmal. Several Fortune 500 companies we have spoken with have grossly under-estimated the number of equipment leases they have. After researching their leases, these organizations discovered they had three to four times more equipment leases than they thought they did.

Why is equipment lease data such a mess? Because very few companies have a dedicated system to track their leases. The management of leases has been left to spreadsheets and desk drawers located around the world.

It’s Time to Clean Out the BasementPwC, the world’s largest accounting firm, has called the new lease accounting standards perhaps “the biggest-ever accounting change.” They know that corporate data on equipment leases is a mess – kind of like the basement you never have time to clean out.

Equipment Lease Data is a Mess

THE BLIND SIDE


Do you know how many leases your company has? Most finance and accounting organizations do not. As a result, future payment obligations are nothing more than a best guess.

Managing equipment leases is like herding cats. It’s very hard to do using email and spreadsheets because equipment leases:

Relatively short lease terms require constant, vigilant end-of-term management. In fact, the equipment lease data issue is really a data management issue.

The old cliché, “garbage in … garbage out,” applies here. Details matter and most companies do not have access to them.

“Herding Equipment Leases” is a Big Challenge

Bad data will be the “blind side hit” that CFOs are exposed to.Details matter! In 2016, this will become a focus area for external auditors, especially the Big Four.

Are distributed globally among various business

units,

Are large in number with lots of stakeholders, &

Move logically and physically

within your firm.

04HOW DO I SOLVE

THE PROBLEM?


ERP SYSTEMS – MIND THE GAAPS


Your ERP cannot capture these details or maintain the link between assets and liability. Adding this functionality is not a simple fix for ERP vendors — it is a major effort that most do not plan to tackle.

ERPs Cannot Get You There

Neither Oracle nor SAP plan on offering a solution for ASC 842 & IFRS 16. If your ERP is a SaaS application,maybe you can wait for your vendor.But it will take years to build anddeploy a behind-the-firewall solution.

Can You Afford to Wait?

AUTOMATE YOUR BUSINESS PROCESSES


The answer is to apply the best practices of business process management to your equipment leasing program to maintain complete and accurate data. Today, Equipment Lease Management (ELM) software solutions are available to help you better manage your leasing process. Think of ELM in the same way that an ERP or CRM solution helps you manage your finance or sales processes.

Take a Business Process Management Approach

Equipment Lease Management (ELM) SoftwareELM software enables you to effectively manage

the equipment lease lifecycle. This includes:

Sourcing:

Competitively source

equipment leases to save six percent.

Performance:

Manage the portfolio and end-of-term to save ten

percent.

Accounting:

Analysis, accounting,

and reporting to comply with the new lease

accounting standards.

QUALITY DATA IS THE KEY TO SUCCESS


Reliable Data = Quality, Both In and OutThe key to complying with the new lease accounting standards is to deliver reliable data to the accounting system.

“Quality in” results in “quality out.”

The key to success is having the ability to effectively manage the equipment leasing process. This will make it easy for your stakeholders to communicate changes. Also consider employing an asset-based lease accounting sub-ledger.

Equipment Lease Management software can help you apply these types of best practices. It will ensure that you have quality data to support compliant financial reporting on a sustainable basis.

05WHAT IS THE ROI OF

SOLVING THE PROBLEM?


HOW TO SAVE MONEY AND COMPLY


Reliable Data = Quality, Both In and OutIf you decide to manage the equipment lease lifecycle with Equipment Lease Management software, you get:

Less compliance risk, andMore cost savings — a lot more.

In this case, Less really is More

Less Compliance RiskEnabling your stakeholders to manage the equipment lease lifecycle effectively will generate the quality data necessary to produce accurate and complete financial reports.

More Cost SavingsFortune 1000 companies waste more than 10 percent of their annual lease costs due to a poorly managed lease program. Most companies pay too much upfront and too much at the end of the lease term. You can save from 17 percent of your annual lease costs if you apply Equipment Lease Management best practices to your leasing process.

The ROI is so significant that you can achieve payback in just a few months.

Question #1

Do I Have aProblem?

Small Portfolio

Medium or Large Lease

Portfolio

Question #2

Where is theProblem?

Real Estate

EquipmentQuestion

#3

What is theProblem?

Lease DataQuestion

#4

How Do I Solvethe Problem?

ERPSpreadsheets

LeasingSoftware

Question #5

What is the ROI?

Equipment LeaseManagement Strategy


FIVE STEPS TO UNDERSTAND THE IMPACT

AccountingPolicies/Controls

The Real Deadline for Lease Accounting is Sooner than You Might Think

While the FASB ASC 842 implementation deadline is December 31, 2019, the SEC will require complete and accurate data for comparable reporting by January 1, 2017. This historical reporting deadline is right around the corner, so we expect auditor scrutiny to intensify in 2016.

Therefore, CFOs should consider this a high-risk area that needs immediate attention.


Read the Fine Print:

WHEN IS THE LEASE ACCOUNTING DEADLINE?

December 31

March 31

June 30

September 30

I/S: December 31, 2017, 2018, 2019

I/S: March 31, 2018, 2019, 2020

I/S: June 30, 2018, 2019, 2020

I/S: September 30, 2018, 2019, 2020

If your year end is: You will have a comparative parallel Income Statement for transition to the new rules for the year ended:


ABOUT LEASEACCELERATOR

LeaseAccelerator is the market leader in Equipment Lease Management software designed specifically for large, corporate equipment lessees. It defines best practices and is used by global companies – including large manufacturers, healthcare companies and high-tech companies such as ATI, Ascension Health, Cisco, Cummins, Eaton, Fiserv, and NetApp – in more than 50 countries to compete, manage, control and account for their equipment leases. LeaseAccelerator generates proven and recurring hard-cost lease savings of 10-18 percent by driving down lease rates and improving return performance.

Using LeaseAccelerator, lessees can manage the life cycle of leases, assets, stakeholders and lessors. It enables decentralized work and controls with centralized data, documents, and reporting – supporting lease vs. buy analysis, in-country lease bidding, performance management, portfolio management, accounting, and financial reporting. LeaseAccelerator integrates with procurement systems (including iProcurement and Ariba) and ERP applications (including Oracle, PeopleSoft and SAP) and serves as a lease accounting subledger. In addition, it’s wrapped by a SOC 1 Type II attestation.

Using LeaseAccelerator, you can control your processes of sourcing capital and booking transactions. Then, over the term, you can manage any asset-level changes in location or business coding. You can also manage any mid-term or end-of-term events (like buyouts, renewals and returns) using notification and attestation capabilities.

These capabilities make it easy to reconcile your portfolio step-by-step at the asset level on a monthly basis and produce auditable financial statements with data that you trust – under the current lease accounting standard or the new one. By adopting LeaseAccelerator, you can remove the uncertainty of transitioning to the new lease accounting standard and continue to use equipment leasing as a strategic tool for your business.

Learn more at www.leaseaccelerator.com

www.leaseaccelerator.com

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