The must-ask questions for systems solution vendors before you decide on a leasing software.
With more than 15 years of experience managing accounting and finance, Matt Waters is an expert on FASB’s new lease accounting guidance. While at Home Depot, he led the project to consolidate data for real estate, equipment and other leased assets into a single department, which increased efficiency for the preparation of financial reports, 10K footnotes, budgets and forecasts. FEI Daily spoke with Waters ahead of FEI’s 2017 Accounting Change for Financial Leaders in June.
FEI Daily: Tell me about your experience at Home Depot and how you were you able to manage all of the leasing data.
Matt Waters: One thing I did at Home Depot was to present a plan to consolidate all the leasing data from around the organization. You can imagine there are thousands upon thousands of leases, everything from real estate to forklifts, trucks and IT equipment and copiers. Most companies fragmented lease accounting practices and the only time it really came together was for the 10k footnote around leasing and that’s once a year, and a lot of times that’s just Excel driven.
We consolidated all that information into my department and it served several purposes. One, it made the footnote process, that annual 10k process, more efficient. It also prepared us to comply with the new accounting standards. There was also cost savings resulting from consolidating all that data. An example was we had 10,000 forklifts, but, once we consolidated, we realized we were paying for 15,000 forklift batteries. You don’t need that many extra batteries. Things like that started to come to the surface.
Last week we were in New Orleans at the CEB finance conference with CFOs and controllers and chief accounting officers and they’re asking things like, “What was the biggest thing that surprised you when you went through that process of consolidating this lease accounting data at Home Depot?” And “What are the policy decisions we need to make now to put us in a place to comply with the new lease accounting standards?”
FEI Daily: What are the big areas concerning preparers?
Waters: I think data is the number one concern and then, specifically, data that we don’t know about. Leasing has been handled as pretty much just an expense on the P&L. It hasn’t been tracked. Companies have their leasing data fragmented out across the organization. They are managed at the division level or the subsidiary level or maybe in the different countries that the company does business. There isn’t a centralized repository or one source to go to for leasing information.
A lot of times companies, while they might not have tracked leases across the board, they’ve at least tracked their real estate leases. For leases that have been capital assets, you can look in your fixed asset system because there has been a capital portion that’s probably recorded in your fixed asset system.
People are designing surveys that get to the key data elements and the definition of a lease and send it out to the people in the field and those can help identify the leases. For a public company there’s one person who works in financial reporting that manages the process of preparing a leasing footnote on the annual report and that person is a great place to start to get an idea of where the leases are. For bigger companies, a lot of times there’s a fleet of leased vehicles, so you can get leasing information from the actual vendors that lease those cars to the company. It’s just an exercise in finding leasing data that has not typically been tracked very well and just getting it all in one place. That’s what people are really scratching their heads about.
FEI Daily: One of the things we’re hearing from preparers as they’re getting ready for adoption is the challenge of identifying a systems solution that can help. As companies are looking to choose a system, what questions should they be asking vendors?
Waters: That’s a great question. I hear that pretty frequently from my clients too. And I actually went through the process at Home Depot and one thing that I look for there a system that is intuitive and user friendly. Can you envision your employees logging into this every day and it being somewhat easy to navigate through? As a practitioner, I spent countless hours in a lease management system and they’re not all created equal.
You get so many requests for information, so I think a huge advantage in a new system is the capability to do custom or ad-hoc reports, even at the user level. If you can drag and drop fields and create your own report and make it meaningful at the time, that’s a huge advantage.
Look to see if it’s been endorsed by an accounting firm. In the software industry, you have to check the track record of the company. A lot of times these companies get bought and sold rather quickly. You want a company that has some strength, some substance behind it and you know that the software’s going to be around for years to come.
Another huge one is updates. Software companies sell you one version and you sign up for one thing. Many times there’s an update down the road. You need to get a good picture before you sign up. How much is the update going to cost? Is it something where you’ll have to pay for a whole new, full-fledged implementation? Or are the updates included with your fees? Another big one is, for any leasing system you’re considering, does it integrate with your ERP system? That’s a huge concern.
FEI Daily: Preparers have been told that the vendors have fixes coming. When should they expect to see those fixes and patches?
Waters: I think software vendors who you would want to consider have a fully functioning system now. I think patches, at this stage in the game, are a red flag. I’d want to see a system that’s functional and ready to go. Maybe a few things that need to be dialed in on a company-specific basis, but as far as the functionality of performing calculations under ASC 842, I think a software vendor should already be prepared for that and you wouldn’t hear much talk about already needing patches. It should be pretty well vetted.
FEI Daily: What are the accounting policy decisions that need to be made at this point?
Waters: There is a package of practical expedients and you can elect to do it or not. It can make it easier for the company or it could make it more challenging. It’s things like deciding whether or not to lump non-lease components in with lease components. The advantage of keeping them separate would be that it keeps the impact to your balance sheet lower so you don’t have as high a liability when you set this up. The advantage of grouping them together is that it eases your administrative burden. You don’t have to make calculations or estimates to split out these lease and non-lease components. That’s a big one that people are interested in.
I think materiality is a huge one. The IFRS has a $5,000 dollar threshold, so for any leased asset valued less than that amount, you don’t have to perform the balance sheet calculation and treatment. The FASB did not prescribe a threshold dollar amount, but did include specific language to allow companies to set materiality.
Another big one is the portfolio approach. The portfolio approach has to do with master lease agreements, or MLAs. Companies have these agreements for leasing a large number of equipment. For example, a company like Home Depot would have a lot of forklifts and these are covered by a master lease agreement. We have some guidance around how you can gain efficiencies grouping these assets together, so you don’t have to have a separate amortization table for each one. It makes a lot of sense for a company to evaluate that ahead of time and decide, “Okay, how is my portfolio organized and can I pick up some efficiencies by grouping things together?”
The last thing I’ll mention is the new requirements to assess options. Leases almost all the time, have options to extend. So the new standard has included the language, “reasonably certain”. If you’re reasonably certain to exercise an option, you’re supposed to include that in your calculations and your amortization tables. That’s something that’s new and companies need to craft a policy around how they decide if they’re reasonably certain to exercise an option or not. And that’s not straight forward. It has to do with a lot of considerations, company by company, and what we say in the lease two different companies, you probably get two different answers. Companies need to be planning for these policy decisions and setting their policy now. In many cases, even before they start the process of data gathering. If you’re setting a threshold, you should do that upfront. That way you don’t have to go after those small dollar leases in your data gathering process and you save yourself a lot of time and headache by starting with your policy decisions up front.
Get the insights you need from industry leaders to manage and prepare for the changes in accounting standards. Register today for FEI’s 2017 Accounting Change for Financial Leaders.•