Calculations under the new FASB ASC 842 and IFRS 16 standards can require up to 75 different data elements across all types of leases – including real estate, equipment and embedded leases.
Closing the data gap while making sure your lease data is accurate, complete and clean is the challenge. Avoid these 10 data traps to successfully navigate this stage of the Road to Lease Compliance.
One: Data is stored in multiple decentralized Databases or physical files.
The name of the game here is consolidation. Climbing the lease compliance mountain and operationalizing FASB ASC 842 and IFRS 16 compliance requires a single database to store all lease administration and lease accounting data elements. Most companies have done a decent job of tracking real estate leases in a single database, but the same cannot be said for non-real estate leases such as equipment leases, or the tricky embedded lease.These leases are stored in Microsoft Access, Excel or even outside the enterprise with 3rd parties.
Focus on cataloging all systems, their specific data sets and invest the time necessary to map each data element to the new centralized database. Doing so will help identify data gaps and create the foundation needed to automate the export, transform and load (ETL) process.
Two: An incomplete data picture for the new FASB ASC 842 or IFRS 16 calculations will require abstraction.
More complicated leases may involve upwards of 75 data points to run the necessary FASB ASC 842 and IFRS 16 calculations under the new standard. Multiply that number by hundreds or thousands of leases and the you’re quickly drowning in data.
Most legacy lease administration and accounting systems captured a sub-set of the required fields and are missing items such as fair market value, economic value and residual values to name just a few. The bottom line is you’ll need to touch all leases to abstract this missing data. Finding a credible abstraction partner who has experience with the new FASB ASC 842 and IFRS 16 data needs is paramount.
Three: Non-real estate leases, such as equipment leases and service contracts.
If you thought real estate leases were challenging, wait until you try and tackle the non-real estate variety. Combing through all enterprise contracts and agreements to determine if they should be classified as a lease, and then abstracting the necessary data elements to run the lease accounting calculations can be a daunting task.
The best practice here is to develop a standardized contract assessment protocol to
apply to each contract. The good news is non-real estate leases have less data to abstract, the bad news is you may have more non-real estate leases than real estate ones. Regardless, make sure to collect data consistently and in a singular structure that can be easily loaded into your centralized database.
Four: Data in some systems may not have been subject to SOX compliant internal processes.
Given the highly decentralized way leases have been managed historically, control-based
compliance for leased assets was out of the reach of most financial teams. The new ASC 842 / IFRS 16 lease accounting standards require a centralized system to manage lease administration and lease accounting, which in turn provides Accounting with the opportunity
to improve their process controls to meet SOX audit requirements. Real estate, equipment and
embedded leases often need different controls which is one of the reasons why SOX §404 controls for leased asset accounting is challenging.
Transform the challenges of meeting the new FASB ASC 842 and IFRS 16 lease accounting standards and your new lease accounting software system into an opportunity to improve SOX compliant leasing processes.
Five: Lack of centralized procurement processes for non-real estate leases.
Procurement processes vary greatly from centralized enterprise-wide functions to
decentralized departmental level procurement, and everything in between. The result is a major
data trap as you don’t know what you don’t know when it comes to buried contracts and data
sources. Service contracts and embedded leases are the main culprits, as real estate leases
tend to be managed centrally in one system. Some companies may use the new lease
accounting practices as a motivating factor to centralize procurement of equipment and
services.
At a minimum, new procurement policies and processes need to be designed and rolled out
across all departments to make sure all contracts are classified as either lease or non-lease, with the former being abstracted into a centralized lease administration and lease accounting software system.
Six: Data is unavailable for the lookback period.
Finding, or in many cases reconstructing, the data required to comply with the two-year FASB ASC 842 lookback period has been a substantial challenge for many organizations. In this case,
procrastination may pay off as FASB is likely to eliminate the lookback period any day now.
While this is a welcome easing of the burden, the deadline still looms large for public companies.
Seven: Proprietary legacy data structures and technology lack adequate documentation
Great, you’re ahead of the game because you have a legacy lease accounting software system with much of the data you need for lease accounting compliance. The problem is, there is limited to no documentation about how the data is structured and how it can be properly extracted. Ideally, you’ll have access to internal IT resources with the technical skills needed to crack the data puzzle. If not, make sure that you select a lease administration and lease accounting partner who has experience with your legacy system and a documented and proven approach to data management.
Eight: Heterogenous data sources and systems
The larger the organization the more likely you’ll face this data challenge. Mergers and acquisitions almost inevitably result in a mix of data sources and systems. The same can be said for large organizations who manage real estate leases in a decentralized manner by operating company, geography or department. The only way past this hurdle is a systematic rationalization of data so that all data aligns across every system.
Once you have your arms around all of the different values for any data element across all of your systems, consolidate it into a consistent list of values (LOV) whenever possible. Doing so will create structured data that is reportable, leads to a better understanding of your lease portfolio and streamlines the inevitable day-to-day questions and analyses that all lease administration departments must contend with. Again, here is where a lease administration and lease accounting software partner with a proven approach to data management is critical as you will need to transform data from the old legacy values to the new consolidated list of values.
Nine: Load size and performance considerations, especially with historical data
Once you’ve extracted and transformed the lease data, you must load it into the new lease accounting software system, which can be a herculean effort given the volume of lease terms, clauses, recurring payments, one-time payments, reconciliations, etc. Now think of all the historical data you will want to load from the inception of each lease. The goal here is faster loads with lower failure rates. The only route to success requires detailed planning that takes into consideration data source dependencies, the use of data load automation tools and robust failure recovery processes and backups.
Ten: Playing data catch-up during the cutover period
A major milestone in migrating to a new lease administration and lease accounting software system is called “cutover,” which is when you switch from your legacy system(s) to the new system (in reality, cutover is actually a time period since it takes days to make the transition). Delta management, the process of managing changing data during the cutover period, must be well thought out and planned to avoid the risk of mixing data and compromising calculations. For these reasons, a high-quality partner with standard tools, templates and articulated reload strategies are worth their weight in gold
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