Six Lease Accounting Software Cost Savings Opportunities
With the implementation deadlines for the new lease accounting standards approaching in the coming years, many controllers and accounting organizations are considering lease accounting software. At some companies, the business justification for investing in a specialized software application is straightforward. Developing the systems, processes, and controls to support major accounting changes is viewed simply as a “cost of doing business.” But at a number of other companies we have spoken to, there may be a need to provide a more detailed business case to support the investment.
Numerous cost savings opportunities can be realized by improving the sourcing and administration processes for equipment and real estate leases. However, those cost savings, while substantial, require a broader multi-year, transformational effort across the enterprise. This begs the question, are there any savings to be achieved by automating processes within the four walls of the accounting organization?
There are six lease accounting software cost savings opportunities:
1) Lease Data Collection
The new lease accounting standards will require companies to maintain a much deeper set of data about their real estate and equipment leases. Up to 100 key terms such as base and variable rents; payment timing and frequency; and options for purchase, renewal, or extension will need to be captured for each lease. How will this data be collected and by who? Will you rely on accounting analysts to key the data into your general ledger? Will you track the data in spreadsheets that can be uploaded? Automating this process with data abstraction technologies can save a significant number of man-hours.
2) Lease Classification
Under current US GAAP standards, the accounting organization must classify each new lease as an operating lease or capital lease. With the new standards, classification will change to operating and finance leases. How much time do accounting personnel spend performing lease classification testing today? And how much time will be required in the future? What is used to perform the calculations supporting the classifications? Spreadsheets? And how do you ensure that no calculation or data input errors are being made? Automating the classification process with an enterprise software application can not only reduce the time required, but also the likelihood of errors.
3) External Financial Reporting
As part of the quarterly record-to-report process, financial data about leases must be collected across the business to produce the necessary external reports. With the new lease accounting standards, the level of quantitative and qualitative disclosures required will increase with leases needing to be tracked at the asset level. How will you collect this data? In spreadsheets? How many weeks are spent collecting the data today under current standards? And how many different organizations must participate? This is an opportunity for lease accounting software cost savings. Automating this quarterly reporting process will yield significant time savings for accounting groups.
4) Internal Financial Reporting
In addition to the corporate-level public disclosures, organizations also need to understand how to perform internal reporting at a business unit level as well. Financials for the leasing program are required to support cash forecasting and annual budgeting activities. How do different business units perform these activities today? Does each business unit perform the analysis differently? Are these reports generated using spreadsheets? How much time is required per quarter to do the analysis? Automating internal reporting functions with software can not only save time, but also improve the quality and timeliness of information available to decision makers.
5) Audit Support
Another time consuming aspect of lease accounting can be responding to questions from external auditors about the classification or reporting of leases. With the new accounting standards, leased assets and liabilities will be reported as individual lines on the balance sheet. As a result, companies should expect a much higher level of scrutiny from their auditors. Where is the data and documentation supporting your leasing financials housed today? Where are the results of classification tests, notes on policies, and judgments stored? How long does it take you to locate master lease agreements, certificates of acceptance, and invoices when requested? This is another opportunity for lease accounting software cost savings. Digitizing and storing all of your leasing documentation in a centralized repository can significantly reduce the time savings associated with audit support.
6) Hiring and Training
The introduction of new lease accounting standards will only compound the challenges for classification testing, audit support, internal, and external financial reporting. The current lease accounting standards are relatively simple as compared to FASB ASC 842 and IFRS 16. How will you ensure that business units and headquarters staff have the appropriate level of expertise to comply with the new standards? How many new hires will need to be made within different business units and geographic regions? Automating many of the routine activities and centralizing reporting can reduce the need for specialized expertise within each division and region.