Originally published via LinkedIn on February 27, 2018: https://www.linkedin.com/pulse/leases-last-my-hot-topics-jamie-l-smith/
You are reading the last of my 2018 hot topic articles – Leases. None of my predictions are overly bold or unexpected: Talent, Automation and Leases. One could say I saved the safest for last. After all, Leases is hot because of compliance – we have to do it and we have to do it for 2019’s first quarter.
So as we come off our implementations of Revenue, Financial Instruments we now face another. Meanwhile many of us are experienced enough to still have distinct and near memories of transitioning to IFRS to begin with.
I’ve been interviewing for our team and one of the first things we address is how key Leases and the implementation of the new standard will be for our upcoming 18 months. I ask “Are you comfortable joining us and working on Leases for the next year or year and half?” And yes, we have attracted and recruited some amazing people! Professionals who recognize that Leases isn’t just compliance and it is more pervasive than most of us have previously experienced. It’s far beyond technical and complex accounting and there is an impact once implemented that extends past the limited disclosure impact many other transitions resulted in. It’s an exciting opportunity for CPAs and articling students to gain a deep understanding of a complex and new standard while also putting themselves in Finance Leaders’ shoes with consideration of the process, the technology, the controls, the business partnering and other elements that are widespread with this new standard.
Alberta and Calgary companies are largely in businesses and industries that rely heavily on leases which brings us to the first obstacle – scoping and triage.
Scoping and Triage – the first obstacle
Scoping and triage is often underestimated and extremely time consuming. If you haven’t started – despite how busy you have been with year-end and how quickly quarter-end is coming you need to make this a priority.
· What defines a lease?
· How do you manage contracts?
· Where are contracts located?
These are simple and basic starting points but many organizations have to involve a great number of stakeholders to address. And guess what? The more departments or business units, the more functions (Finance, Operations, Capital Assets), the more people …. the more time consuming and complex that first step of triage and scoping becomes. Yes, I know what you are thinking “we’ve quantified the impact of leases for years in our external disclosure, how is this such a big deal?” True but the materiality and diligence of that disclosure versus what is required to implement the new standard seems to be differing widely for most and comes as the first unwelcome and unexpected surprise of the project.
There are many of the usual project steps required for the implementation of the Leases standard and many of the usual challenges as well. An operational one that stands out is the calculations and journal entries which are required.
Systems and processes – operational considerations
The data collection, the process and the technology considerations go far beyond what most industries had to tackle with recent standards or changes in GAAP. For many, the volume and risk of the calculations and journal entries will eliminate the possibility of using Excel. There are numerous software solutions available and the sophistication (and price) varies widely. It will be key for organizations to understand their requirements and their business objectives and growth as they decide what, if any, system solution they will select.
Does the system:
· Deal with contract modifications, re-measurements & variance payments
· Integrate with your current ERP or system
· Provide an audit trail associated with the journal entry and provide continuous journal entries with liability, interest and amortization
· Track renewal and termination options within the agreement
· Assist with financial statement disclosures
· Provide industry agnostic alignment or was it build for real estate or other specific industries?
· Electronically store documents
· Calculate the lease liability and ROU throughout the contract
· Are current users happy with it? Are they using it for similar purposes?
And let’s face it experts in technical accounting don’t always have expertise in process and systems so how will the Steering Committees and project teams ensure that decisions are being well thought out and that the right information is being considered? And the right team members, business advisors and consultants are included?
And how will those committees and teams ensure that their people don’t get so tangled in accounting research memos, system selection and implementation and project management that they forget to take a step back and think of the key performance metrics, the balance sheet presentation and the financial statement user (investor)’s perspective?
What about covenants and other ratios?
And how about controls and the audit?
It is a lot and I haven’t covered it all. Meanwhile, as per usual, Finance Leaders and their teams have been busy, so I think it’s hot for 2018. It is pervasive and stimulating and an opportunity. Do you agree or are you already in the final stretch?
Articles and videos that relate:
My original article: https://www.linkedin.com/pulse/too-late-post-2018-predictions-jamie-l-smith/
My Talent article: https://www.linkedin.com/pulse/talent-hot-finance-2018-jamie-l-smith/
My Automation article: https://www.linkedin.com/pulse/automation-finance-lightbulbs-jamie-l-smith/
Deloitte point of view on leases: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/risk/us-advisory-lease-accounting-overview.pdf