New lease accounting: Mitigate risks, tap opportunities

3B 2017 08 Post it MeetingThe new leasing standard — ASC 842, Leases — is still at least 18 months out for all adopting companies. Yet, it is starting to gain a lot of attention. To tap into this attention, there are numerous, new software solutions on the market claiming to help with the implementation of the new standard. These software solutions promise to solve your company’s issues relating to the implementation of the new standard, from calculating balance sheet assets and liabilities, to providing journal entries and controlling changes in the lease status. Yet, before you purchase a software solution, you should focus on gathering and evaluating all your lease data. Doing so can reveal risks and opportunities that might influence your decision to purchase software.

Mitigate data risks ASC 842 will bring lease information to the attention of auditors because the new standard shifts the recording of lease information from the P&L to the balance sheet. Auditors will be looking for both completeness and accuracy of the balances as they focus on the new balance sheet item.

This means that, to mitigate risks, companies need to ensure that their lease calculations and disclosures are accurate and complete. Yet, the amount of data points required to complete these calculations and the required disclosures are significant. Collecting and verifying data takes substantial time and will require a consistent effort to accomplish. We estimate that depending on the complexity of a company’s leases, data acquisition and review can take between 1.5 and 3 hours per lease; some leases can take even longer. This means that every 40 leases in a portfolio can conservatively take a month of focused time.

Many organizations will spend significant time on data capture and validation, even though they can use technology to accelerate efficiency, e.g., optical character recognition (OCR). Technology though won’t be able to trump the importance of planning around data capture as early as possible. This will be a critical element to lighten the burden companies face regarding risks posed by capturing lease data fully and with accuracy. The best way for companies to make adequate collection of data happen is to dedicate resources to work on this part of the project consistently and with minimal interruption.

Collect ROI on data opportunities In a 2005 SEC survey, the estimated operating lease value managed off the balance sheet for public companies was $1.25 Trillion. Today the number is thought to be closer to $2 Trillion of spending, potentially higher. But companies have little insight regarding the parameters of this spending because data relating to lease accounting has been tracked loosely so far.

The new standard presents new business opportunities. In the future, companies with leases will benefit from a new negotiating insight brought about by the requirement to collect lease data. This new data will break information by lessor and by category and will separate lease payment from interest and from service spend. In addition, while companies will have to purchase and use software and analytical tools in the collection of data, these new tools will also allow for data standardization and will enable comparisons between leases. This will offer a range of insights on leases that will be available to enterprises for the first time and will completely change lease negotiation going forward. Hence, lease negotiation will become a more focused category in procurement departments. Lessees will have considerably more negotiation power and lessors will need to be sharper with common terms and pricing among leases.

The amount of data collected by lessees represents a significant amount of power, which will only increase with time. In the short-term, individual companies that are lessees will benefit from the collection of data because they will be able to identify internal efficiencies. In the long-term — as the data market matures for 842 — the collective lessee data will generate benchmarks across lease types, industries, and lessors. Specifically, in the short-term, as companies implement 842, they will be able to identify lease and service charge ranges and ultimately find the highest priced leases within their portfolio. In the long-term, using lease benchmarks enabled by data, companies will achieve significant savings.

Data collection and presentation is going to show up as savings in a few different ways. First, the ability to compare and contract payments and services will allow for more negotiations based on data points, measured against historical norms and comparable leases. This will standardize pricing. Second, competitive pricing will ensure transparency, which will push a share of the lessors on the market to offer better pricing and terms. This will continue to create a race to the bottom and knock down pricing on leases and related services. The results will be less payments and commoditization that lessees should be able to leverage into hard cost savings.

In Summary ASC 842 will require an exceptional amount of time that will be dedicated towards collecting and validating lease data to ensure that it is accurately and completely represented on the balance sheet. However, this change will also give an opportunity to lessees to analyze and negotiate leases in a way they have not previously been able to, which will generate the potential to find savings to pay for the implementation of the new standard and to reduce lease spend over time. The lease market will be an interesting place to watch over the coming years: data is power and the market is about to have a lot more power behind it.

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