This article addresses implementation failures, focusing on technology, financial impact, time, cross-department coordination, equipment lease and new abstraction requirements.
The new FASB ACS 842 requirements will require you to manage lease and accounting data much differently than you are now. As we’ve worked with our clients to complete implementation, we’ve come across seven misconceptions that—if ignored—could prove costly.
The first misconception relates to implementation time. As noted in our last article, “The 6 Fatal Points of Implementation Failure,” standard deployment is expected to take six to nine months for companies with an abundance of leases, and will likely be performed by a cross-functional team who have full-time positions outside the scope of the FASB project. A recent EY study indicates that 78% of businesses are not ready for the new standard. You’ll need to find, normalize, abstract and analyze lease data. Then you’ll need to deploy and test your technology solution. So, plan now—and plan wisely.
The biggest misconception is that the data you’ve already collected in Excel spreadsheets and current systems will work. Not so—the data elements you’ve collected might not meet the new definitions, and system integration will always have challenges. Also, lease abstraction is a timely process. Your project plan should include taking a fresh look at data you’ve already collected. Also, in year two, if you have extensions or revisions to the lease, using Excel will not help guide you through those changes as the lease software will, and you may get the wrong answer.
Be sure to understand the cost structure from your supplier up front. Support costs in year one will likely be twice what the software costs. Lease administration software is very reasonably priced—and online software models will assist you in deciding to “buy” vs “build.” Setup fees are the true costs for FASB modules and preparation. Ask your provider to provide you with pricing for training, abstraction, reporting, ad hoc reporting, custom fields, integration, and ongoing support. Every provider has a different model, and software costs are just one part of the formula. Ask for a year one and year two price plan.
Because accounting for equipment leases is a new requirement of this standard, it’s likely you don’t currently have lease data outside of the agreement. And, because this is typically handled at a local level by operators—not the real estate team—you might not even know where the leases are. Even if equipment represents a small percentage of overall liabilities, most companies are building the equipment lease process and data from the ground up. This will significantly drain your time resources, so don’t get caught off-guard.
In addition to building a cross-functional internal team to complete implementation, you’ll also need external support. Your external team will likely include your accountant, a consultant, and your solution provider. Build your internal and external teams early and get ahead of the process. Demand for consultants and suppliers will soon outstrip supply, and the closer we get to year end, the thinner those resources will get.
Many companies are relying on their ERP provider to deliver a solution, or they are looking for an add-on solution just for the new FASB standard—but be cautious as these are undeveloped and untested solutions. Most ERP companies haven’t ever produced a FASB model. While it’s possible these solutions may work for a small number of leases, they’re extremely risky if you have multitudes, and integration and testing will present added layers of challenges on untested systems. Instead, consider building a solution that allows you to comply while at the same time upgrading your lease and accounting reporting. This is an opportunity to transform your accounting function—an opportunity that patch and add-on solutions won’t provide.
If you manage large numbers of leases, you will need technology from a third party. And while many vendors may look the same on the surface, there can be big differences. There are four questions you should be sure to ask every provider:
Next in our Leasing series, we will focus on the five common mistakes almost every company makes.