The Five Big Line Items You Need in Your Lease Accounting Budget
A key factor in the success of your lease accounting initiative will be properly budgeting for the incremental resources and costs needed to successfully complete the project. Most companies will need to purchase a specialized lease accounting software application. They will need to get help from outside consultants to implement the software – especially with collecting and populating all the necessary leasing data. However, developing a lease accounting budget will be challenging as there are few, if any, external benchmarks available to use as a foundation for your estimates. No large companies have implemented the lease accounting standards yet.
Below we will talk you through the five major line items that you will need to consider for your lease accounting budget:
1) Assessment and Planning
You may need some help from outside consultants to assess the impacts to your financial reporting, tax strategy, debt, and leasing programs. Do you need to conduct a pro forma analysis of the impacts to your balance sheet and income statement? Do you need to assess the impacts of changed financial ratios such as EBITDA to bank loans and debt covenants? Do you need to assess the impacts to sales, property, and income taxes across various states, countries, and municipalities?
You will also need to conduct an assessment of the current lease administration and accounting program. What are the systems, processes, and controls that are in place today? What changes will be required to comply with the new accounting standards? You will need to assemble a cross-functional team of experts from Accounting, Finance, Treasury, Procurement, Real Estate, IT, and Operations to conduct the analysis.
2) Lease Accounting Software
You will need to select a lease accounting software package. It is a database to track all the key contract terms for your leases – start and end dates; base and variable rents; and termination, extension, and buyout options. It should have the ability to store all the related master lease agreements, schedules, purchase orders, and invoices. It should have a lease accounting subledger that can generate the necessary journal entries for both the current and new US GAAP and IFRS standards.
Enterprise class lease accounting software is typically priced based upon the number of end-users or the number of leases. Costs will vary depending upon which software deployment model you prefer. You can have your IT team run the software in your own data center or subscribe to a Software-as-a-Service (SaaS) delivered in the cloud.
3) Software Implementation
As with any application, the “off the shelf” version of your lease accounting software may not meet the specific needs of your business. You may need to customize your lease accounting application to match your specific business processes, accounting policies, and leasing programs. To ensure that your lease accounting software is always up-to-date, you will need to integrate it with other enterprise applications such as the ERP, general ledger, accounts payable, asset management, and real estate lease administration.
You will need to perform functional testing on the new application to ensure that it produces proper accounting results for both the current and new standard. Once you have worked through all the bugs, you will want to conduct user acceptance testing with key members of the Accounting organizations. Then, you will need to train and rollout the software to the broader user community which might include members of the Real Estate, Accounts Payable, and Operations teams.
4) Data Collection and Upload
The data capture and upload process will be the most time-consuming aspect of your lease accounting project. At most companies, leasing data is not warehoused in a single enterprise-wide repository. It is scattered across various spreadsheets and applications. Some leases may be stored in a binder on someone’s desk or a file cabinet in an office. You will need to locate each of the lease schedules for all your real estate, fleet, IT, and other equipment leases.
Next you will need to perform a data abstraction process. Each lease will need to be reviewed to identify and capture the relevant data elements. The process can be accelerated by the use of automated “data abstraction” software which uses machine learning to scan and interpret leases. Expect that for many of your leases you will have to research missing fields. You will also need to investigate inconsistencies in the lease data that might arise from comparing different sources.
5) Project Management
A large scale project such as lease accounting will require dedicated oversight and governance for success. You will need an executive sponsor and dedicated project management resources to ensure that plans remain on schedule, within scope, and on-budget. The project management function will also on-board new team members, monitor for potential risks, and escalate time-sensitive issues. The executive sponsor will champion the initiative, clear potential obstacles, and secure the necessary budget for the project.