The standard for accounting for leases has technological obstacles

The lease accounting standard that state-owned enterprises are set to comply with by the end of the year presents them with certain technological obstacles, according to a new report from Big Four Deloitte.

The challenges include new data elements, data hosted in various systems, relevant information spread across multiple leases, high volume of data fields, and multiple languages, contracting parties and currencies. In many cases, rental contracts are not in electronic format, and there is often a lack of internal resources to deal with the new standard.

“We are clearly seeing that companies are not fully prepared to implement the rental standard,” said Jeanne McGovern, audit and insurance partner at Deloitte. “They see a number of key challenges in terms of operationalizing, collecting data and working on any system, whether it’s changes or implementing a new system. At this point, the challenge is that time is running out to be able to execute and be in compliance by January 1, 2019. ”

The new lease accounting standard, which the Financial Accounting Standards Board and the International Accounting Standards Board have collaborated on for several years, will add operating leases to companies’ balance sheets for the first time. It is likely to have a big impact on business finances in many industries, including airlines, real estate, and the retail industry. Although there are differences between the versions of the individual standards that eventually emerged from the FASB and the IASB despite their long-standing convergence effort between US GAAP and International Financial Reporting Standards, the two standards boards have taken the big step by entering leases on the balance sheet. .

One question for many businesses is whether they should use cloud-based technology or an on-premises solution, according to the report. Another strategic question is whether or not to centralize or decentralize the systems and processes related to leases.

“Our research is about what the company’s lease portfolio actually looks like and how complex it is,” said Sean Torr, Managing Director of Deloitte. “It’s clear that most companies are looking for some form of technology solution, whether it’s modifying their existing solutions or procuring a new solution. For most companies, their overall implementation has a technological component. The readiness level of most companies is lower than one would expect at this point, so companies are grappling with the chronological component of this implementation. There are a few very long-time activities that you need to do – select, install, and test technology solutions, as well as populate that solution with the data needed to do all the calculations, so that the time window quickly narrows for businesses. Companies are starting to realize that there is still a long way to go to prepare for the standard.

At a recent Deloitte conference in Washington, DC, on the rental standard, the company asked business executives in attendance about their concerns about adopting the new standard. It found that 49% of respondents cited the cost of implementation, 21% referred to the material impact on the company’s financial statements, 12% cited time limits for the participation of executives and 5% mentioned data security issues.

Some companies may decide to install a temporary technology solution before they run out of time.

“There are definitely solutions that a company can put in place in the interim,” Torr said. “In fact, we are starting to see more and more companies exploring an interim solution while implementing a longer term solution. There are solutions that businesses are starting to realize they need to meet the compliance deadline. This gives companies the opportunity to focus on the larger components of the process and the technology over the long term. Some companies are considering setting up a lease administration as well as a lease accounting solution. These solutions may take longer to implement than the time window available to them. That is why they are also exploring this interim solution.

If companies go for a temporary solution, they should try to avoid repeating the same job.

“When companies think they need to implement an interim solution before they have a long-term view of how they manage their lease portfolios, try aggregating and pulling together lease data once. with a long-term solution in mind so leases don’t have to be double-processed, ”McGovern advised. “They only need to be examined and the relevant data collected once. It is important that companies think about their long-term goals and incorporate them into their planning, even if they have to choose a solution that is easier to implement.

When asked which area of ​​their business planning is most affected by the new lease accounting changes, 37 percent of those polled by Deloitte cited compliance, 23 percent said new policies business, 14 percent cited financial planning, 9 percent cited lease or purchase decisions. , and 5 percent referred to tax planning.

When asked which area they focus on most with their auditor or clients, 73% of respondents cited the completeness of lease accounting, 11% referred to materiality issues, 7% cited internal controls and 2% cited technology advice.

Private companies have an additional year to implement the new standard, just as they do with the revenue recognition standard. But they shouldn’t have to wait long to prepare for the rental standard, even though they are still in the process of implementing the rev rec standard that will go into effect for them next year.

Another recent survey from Deloitte found that professionals in private companies are starting to assess the impact of the revenue recognition standard on their financial statements as well as on business functions outside of finance and accounting. While 25 percent of survey respondents expect a significant impact on their company’s financial statements as a result of the rev rec standard, 13 percent indicated that their organization has already developed a plan for others. parts of the business. 23% are still in the preliminary stages of assessing the impact of the revenue recognition standard on business functions.

“Private companies should start taking a look at the lessons we are seeing and learning from public companies and start earlier, as some of these activities have long lead times,” McGovern said. “When we surveyed some recent clients, both public and private, we saw figures of around 21% who feel they are well prepared to implement the [leasing]standard, and it’s much lower than we would expect with that little bit of time remaining. Hopefully private companies will start putting together teams to work on this. “

The technology to manage the rental standard will need to be widely available in businesses. “One of the things we are seeing is companies realizing how important stakeholder engagement is in this initiative,” Torr said. “This standard really has an impact on a lot of stakeholders across the organization. As companies go down the final route of standard readiness, make sure that stakeholders are very well informed and involved in the process. A number of stakeholders will benefit from the technology. The data will impact a lot of people. The clear message we are hearing from the marketplace and conferences is that stakeholder engagement, communication and training are really important.

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