Everyone in the accounting and finance world is inundated with information about the new lease guidance, from its effective date and primary financial statement impacts to the inherent complexities and best practices for a successful adoption.
This flow of information confirms that, yes, the impact of the new guidance is in large part a gross-up of the balance sheet aimed at improving comparability among companies and more accurately reflecting a company’s financial position.
Yes, ensuring a complete population of leases, including embedded leases, and abstracting pertinent data from those leases requires a concerted organizational effort. And yes, companies will most likely need to implement new processes and invest in lease accounting software.
However, with all that has been written and discussed about the new lease accounting standard, is it possible that the most important and beneficial aspects of implementation have yet to be unearthed? Can companies unlock certain operational benefits, thereby reducing costs and increasing the bottom line, as part of adopting this new guidance?
In a word: Absolutely.
If the implementation is approached strategically and thoughtfully, the inevitable byproduct is a centralized and efficient lease management structure that yields significant benefits to companies in providing greater data visibility, more robust governance, and increased resource optimization.
Faster, Better Decision Making
In an area as critical as procurement of capital assets, centralizing lease management will increase a company’s ability to analyze its lease spending by making all of the lease data visible and in one place.
A centralized system will not only house the payments, terms, vendors, and locations of lease spend. It also will provide data on key procurement decisions such as how often leases evergreen, which vendors are used for similar assets, and the types of end-of-term options commonly negotiated.
Consider a company with numerous locations that leases hundreds of copiers from multiple vendors. With a centralized view of lease data, this company would be able to see how often and what terms are negotiated for each copier and realize cost savings by consolidating vendors and terms for all copiers.
Additionally, increased data visibility improves the accuracy and efficiency of financial reporting using automated calculations and workflow. That enhances the ability to rely on lease data for disclosure and reporting and reduces reporting risk for potentially material obligations.
Increased Control over Spending
As companies grow, managing operations spending is a crucial concern — but gaining a full picture of lease spending is often more difficult. By creating a global inventory of lease assets, financial executives will be able to see the breadth of a company’s leasing program and where leasing decisions are not appropriately managed.
In many companies, equipment leases may be negotiated at the local level without complete visibility of similar leases and their respective performance. The centralized lease management required to maintain the data for the new lease standard can determine where current spending limits are not observed, which will ultimately improve a company’s ability to enforce the appropriate procurement policies.
Improved Cost Management
The impacts of negotiating a bad lease can be significant and long-lasting. That’s why access to relevant and insightful information when faced with lease versus buy decisions is important.
Most operations personnel are not privy to the company’s lease strategy or current lease data and therefore make decisions based on the operational needs of the business without considering the best financial decisions.
Moving from decentralized lease management to centralized lease data and management will give companies the power to negotiate lease terms that are globally optimal instead of locally suboptimal.
For instance, a regional warehouse manager who wants to procure additional warehousing space quickly does not have to make financially suboptimal decisions. Keeping her operational needs in mind, she can leverage company lease data to get a competitive rate and negotiate a better lease with an existing real estate vendor, thus enabling her to optimize the decision both operationally and financially.
As a secondary impact, the same lease data could also be leveraged to negotiate and utilize vendor managed inventory options. Easy access to better lease information leads to globally optimal leasing decisions.
Lease Accounting the “Right Way”
Companies that implement the standard with the long-term view toward improving processes and identifying efficiencies must embrace three critical factors to successfully realize these ongoing operating and cost-saving benefits.
Cross-team collaboration: Colleagues from various functions such as accounting, procurement, real estate and IT, who normally have little to no interaction, must work together to identify leases and find long-term process solutions to yield efficiencies for future lease management.
Business process changes: Reporting requirements of the new standard demand a new level of rigor. To remain compliant, companies must optimize their processes around entering, managing, and tracking leases. Processes should be redesigned to capture and track key lease data for companies to maximize technology investments and realize benefits beyond financial reporting.
Furthermore, improved lease-spend analysis and procurement capabilities should be inherent in accurately tracking the data required under the new standard.
Technology system investments: Investments in lease accounting software will centralize data for optimal viewing, reporting, and analyzing lease spend information. A proper system implementation is key to the continuous utility of lease management tools, including careful consideration of how lease accounting output will interface with the general ledger, how lease payments will be reconciled to accounts payable, and how lease expenses will be allocated across departments.
Implementing the lease guidance is undoubtedly challenging and complex, requiring significant investments of time and resources. However, approaching the project with a view toward long-term benefits will let companies better manage their lease spend and realize benefits beyond financial reporting.
Bill Maloney is an executive managing director at Riveron Consulting, responsible for national leadership, strategy, and development of the firm’s financial advisory services practice. Udit Sharma is a managing director at the firm, responsible for client service, specializing in supply chain improvement, EBITDA enhancement, and operational due diligence. Patrick Garrett, a director at Riveron, focuses on technical accounting matters, lease accounting, and revenue recognition.