Lease accounting: 4 Tips on when to purchase software

Purchase SoftwareASC 842 — Leases — the new leasing standard, begins official standard adoption on January 1, 2019; early adoption is permitted.  While there are many technical accounting decisions to be made, a lot of the current focus regarding this standard’s implementation revolves around software. It is a fact that software will be necessary for any company that has more than a handful of leases, due to the complexity of the lease accounting, as well as due to the requirement to record the history and balance of leases.  There is no shortage of software in the market to accommodate this demand, and for a company starting to research implementation, the variability of offers and the multitude of options can be an overwhelming burden.  While software selection is ultimately going to be an important part of the standard for adoption, companies can take a more strategic approach and defer purchasing software. Today is the best time to focus on other aspects of the implementation and there are many reasons why selecting software can wait. Here are a few tips we recommend:

  • Wait and see because not many software packages are fully ready now. Available software packages are still playing catch up with all the recent updates to the FASB language and the continued refinement of expectations. The solutions available on the market are not mature yet. While they already have many features and capabilities, they are not extensive enough to account for every scenario in any commercial package at this time. This makes it difficult for your company to get a customized solution that works for your needs. Thus, since making decisions on software today requires that you trust the roadmap and believe that the execution will work for you in the long term, we recommend that your company focuses on gathering the data while waiting for the software market to mature.
  • Waiting will get you a better ERP integration. Today’s leasing software options are mainly made up of packages that are independent from major ERP packages and do not have the ability to integrate with any of them.  Despite the fact that many ERP packages advertise 842 compliance, they have not yet reached a development maturity to ensure 842-software readiness. Eventually, the market will see a consolidation of all the existing ERP packages through acquisitions, especially of those that do not have an 842 solution yet. Since these acquisitions will dramatically affect software that is today “stand-alone,” it might be worth waiting that the marketplace plays out a bit more, which will enable long-term partnerships and alignments to form.
  • Buying software later can get you a better price. Licensing costs with many of the current software competitors can be expensive now and not fully aligned to the number of market entrants.  Current capabilities among software packages lack differentiation. So, while not necessarily a race to the bottom of the market place, the competition for market share should see pricing concessions occur more frequently, as the market matures with additional entrants and a more competitive pricing battle.  At a minimum, it is doubtful that costs will increase. This creates opportunities for companies that can be patient and wait on pricing.
  • Focus on your company’s readiness assessment and transformation today; purchase software tomorrow. There are many good software packages on the market and a key decision point that your company should consider now is alignment to company processes and business requirements.  Companies have many models for negotiating and approving leases, and different software aligns to different models.  Decentralized organizations need to focus on cloud options and multi-user scenarios, along with workflow customization for approvals and various reporting.  Centralized organizations can focus on automation and standardization.  While many software packages can accommodate both scenarios, going through a readiness assessment and transformation prior to locking software is a helpful way to make sure that you will secure long-term alignment when purchasing software.  A readiness assessment allows companies to prioritize the software requirements that are most important to them and align the ability of each software to manage and customize those requirements accordingly.  It also facilitates cultural and support alignment, which is learned through interaction and discussion.

Software selection will undoubtedly become an important part of the leasing standard and should be front of mind for anyone running this transformation.  That said, it does not have to be the first area of focus. Instead, now focus on gathering your data into a central repository and on defining your process around governing, updating, and managing your data. A central repository should be able to interact with any software when the selection process does occur and allow for progress on ASC 842 without a day-one dependency on software. So, waiting on software is a smart move, as it will get your company not only a better price, but also a better alignment with your needs and business strategy.

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Chris Stephenson
Principal, Business Consulting and Technology
T +1 425 214 9821