Senior Director Solution Consulting – EMEA, LeaseAccelerator
Consistently meeting the ongoing compliance requirements of the new lease accounting standard, IFRS 16, is no mean feat. The extra resources that finance leaders had at their disposal to meet the 1 January 2019 deadline have now faded away and senior stakeholders are expecting nothing short of a miracle from understaffed accounting teams. Could Lease-Accounting-as-a-Service be a cost-effective and time-efficient solution to these challenges?
Bringing nearly all leases on to the balance sheet for the first time, the legwork associated with IFRS 16 transition, or ‘Day 1 compliance’, has been widely reported. There has been less focus, however, on meeting the ongoing burden of ‘Day 2 compliance’ – and many finance teams across Europe, the Middle East and Africa (EMEA) are struggling to accurately record all of their lease transactions.
Aside from the sheer complexity of the conceptual frameworks within IFRS 16, the new standard brings with it greater focus on asset level accounting. This means that even modest lease portfolios can result in a significant workload for finance teams. It’s no longer acceptable to have a high-level overview of the company’s leases, granular detail is required over each asset in order to perform robust analysis of the lease portfolio.
Furthermore, the new standard requires frequent reviews of individual leases, and often, re-measurement. Since IFRS 16 is a principles-based standard that allows for interpretation, re-measurement can lead to inconsistencies unless a rules-based workflow is in place. In addition, different events across the lifecycle of a lease can trigger yet more accounting entries – again, at an asset – rather than lease-level (see fig. 1).
Fig 1: Events throughout the lease life cycle
As such, lease accounting is certainly not a question of ‘plugging the start and end date of a lease into a spreadsheet’ and leaving it at that, despite what management might think!
In fact, IFRS 16 is shining a light on the inadequacy of Excel to cope with modern lease accounting requirements. To manage thousands of assets in a spreadsheet and to accurately record all of the events throughout the lifecycle of those leased assets would require an army of people. Not only would extra headcount be required, but any additional employees would need to be able to navigate the complexity of IFRS 16 day in, day out. And hiring experienced personnel comes at a significant cost.
Moreover, using a spreadsheet for lease accounting becomes extremely challenging when an organisation is operating in multiple countries across the globe. Take a fleet of leased cars, for example. If you are part of an accounting team in London, how do you know in real time if a car in Dubai has been stolen and needs to be written down, which will require modification of the lease? Yes, email can be used to keep track of such events, but there is still manual effort required to transfer that information into the relevant spreadsheet and adjust the lease accordingly.
Technology to the rescue
Arguably a simpler solution would be to have a single cloud-based lease accounting platform that can be rolled out to permissioned users across the globe, enabling them to log on quickly and modify the lease. Any changes would be reflected in real time to all platform users. What’s more, having a tightly controlled workflow through such a platform, and clear segregation of duties among users, demonstrates good risk management to auditors and regulators.
The potential benefits of lease accounting software run far beyond improved internal controls, however. Stakeholder visibility over the leasing portfolio is another benefit of using a cloud-based solution, especially since bringing the majority of leases on to the balance sheet for the first time has piqued the C-suite’s interest in leasing portfolios and lease versus buy considerations. Internal and external auditors can also be authorised to view the company’s lease accounting platform, as can shareholders, where appropriate.
What’s more, with intelligent lease accounting software, users can interrogate the system themselves, either finding answers to their questions or performing independent testing, without the need to touch base with the finance team. The benefits of such a set-up should not be underestimated.
Fig 2: Measuring the Value of Lease Accounting Software
Getting more from lease accounting
However, it can be tough for finance functions to build the business case for lease accounting software as they will already have Excel installed, therefore the additional cost of this software needs to deliver maximum benefit. By configuring this new system to best effect, the total cost of ownership will actually reduce as the headcount requirement reduces more dramatically than the incremental software cost increase.
To maintain this benefit going forwards there are managed solutions providers who will perform this initial configuration work as well as maintaining it on an ongoing basis, minimising the human input required from the company – something we call Lease-Accounting-as-a-Service (LAaaS). The idea is to bring in an expert consultant alongside the software solution provider, so the platform is rolled out and configured correctly from the outset in a way that delivers maximum value to the business.
Bringing in an outside expert, from a firm such as Qiado, should reduce the software implementation time, ensure complete lease portfolio visibility, and enable maximum automation; all of which should add up to a better return on investment (ROI). Through LAaaS, finance teams can:
Another plus of LAaaS is 24/7 support from expert professionals. Whereas a software vendor will deal with the implementation of a system, a consultant such as Qiado will hold the finance team’s hand from start to finish – truly understanding the company’s workflows, sensitivities and pain points, as well as plugging any knowledge gaps.
To bring this to life, figure 3 outlines an example workflow featuring Qiado’s Jira platform.
Fig 3: Lease-Accounting-as-a-Service in action
Future-proofing lease accounting
In summary, LAaaS has the potential to enable the organisation to consistently meet ‘Day 2’ compliance requirements on an ongoing basis, without the need for additional headcount. Through LAaaS, finance teams can also benefit from rigorous, automated controls to ensure asset-level regulatory compliance throughout the lifecycle of a lease. This essentially enables the corporate to build a cloud-based ‘virtual’ leasing centre of excellence, regardless of where they are located or how constrained their internal resources are.
With correctly configured lease accounting software in place, finance teams can also look to become more strategic when they renew their leases through competitive sourcing, for example. This is arguably more of a ‘Day 3’ project, but for those looking to secure maximum ROI from their lease accounting software it is an important aspect to consider when going through the RFP process. Not all lease accounting platforms offer a sourcing marketplace that can deliver returns in excess of 6% on typical lease agreements, for example.
Likewise, not all lease accounting software providers ensure straight-through processing between systems or deploy military-grade security to keep clients’ data protected. Naturally, these benefits come at a cost, but good-quality lease accounting software, combined with the LAaaS approach, pays for itself time and time again.
Joshua May Senior Director Solution Consulting – EMEA, LeaseAccelerator
Joshua May FCCA has worked in finance for more than 20 years. In 2015 he moved into consultancy having seen the benefits that software as a service (SaaS) and automation can bring to the finance function. Initially at BlackLine and more recently in his current position with LeaseAccelerator, Joshua has played a key role in driving business across Europe, the Middle East and Africa.
