In Think Before You Act, we focus on the importance of setting strategy to address the new FASB and IFRS lease accounting standard changes. While there may be a temptation to dive in head first, there are key questions you need to consider before you go too far down the road, including: how much time do we really have left, who should own the project within your organization, can your system handle the new standards, how do you deal with embedded leases and equipment leases, and how do you chose the right partners to help?
Bart Waldeck, Tango’s CMO and SVP of Product Strategy, is joined by Rick Zelinsky, Vice President of Product Strategy at Tango, who has more than 20 years of experience in lease administration and accounting and is the main architect behind Tango’s lease solution. Today, Rick spends the majority of his time out with clients in the field, helping them walk through this process of getting to compliance so, he’s really a perfect guest for this podcast’s topic.
Are you feeling worried about the looming deadline for FASB and IFRS lease accounting compliance? Well if you are, you’re not alone. Welcome to Tango’s Road to Lease Accounting Compliance Podcast series. Where we’ll be discussing the steps a company needs to address in order to ensure your organization is ready. We’ll be covering everything from setting strategy to understanding policy, handling data requirements, picking the best technology and finally, institutionalizing the right processes and controls to ensure that they represent a permanent shift in the way you account for leases.
Hello everybody, my name is Bart Waldeck. I’m the Chief Marketing Officer and Senior Vice President of Product Strategy at Tango. In today’s podcast episode, Think Before You Act, we will be walking through a series of questions that you should consider before you get too far down the road to compliance. If you answer these questions or at least explore their implications, you’ll be ahead of the game, which will translate into greater confidence that you’ll meet the deadline as well as reduced risk. I’m joined today by Rick Zelinsky. Rick is the Vice President of Product Strategy at Tango and has more than 20 years of experience in lease administration and accounting and is the main architect behind Tango’s lease solution. Rick spends the majority of his time today out with clients in the field helping them walk through this process of getting to compliance so, he’s really a perfect guest for today’s topic. Welcome Rick.
Thanks Bart, happy to be here.
Absolutely. Okay, well let’s start with some basics here. There was a recent study in 2017 done by CBRE and PwC around kind of where people are in the process of implementing these new standards and the question was, which of the following best describes your company’s status in adapting to the new lease accounting standards? Not surprisingly, 52% of companies who responded are still in the kind of the assessing the impact stage. Only 23% had started actually formulating a team and moving towards compliance. 24% of the respondents were actually in progress of implementing changes in order to adhere to the new rules and only 1% were complete. So, not a surprise but it is a bit of a wake-up call. So let’s start with the basics. I think the question most people kind of want to answer first or think through first is, how much time do we really have left?
Sure and you know I think as the deadline kind of looms, it’s critically important to know when you need to comply in order to put the pieces together. For public companies, their typically in need of compliance by their fiscal year 2019 reporting and essentially that means for the most part, the end of Quarter One of 2019. The private companies are afforded some additional time so they get until the end of Q1 of 2020. In either case, doesn’t leave much time.
Certainly not. That is a short window that keeps closing. Alright so now we kind of have a good understanding of what time is left. I think the next obvious question to think through is, or you should think through as you launch this is kind of project, who’s on first, who actually owns this compliance project? Initially getting to a state of compliance and then ongoing kind of operationalizing compliance.
Bart, you make a really good point. I think it really needs to be looked at as two distinctly separate considerations. The compliance project itself and then the ongoing compliance. So let’s first address the project of being compliant. And I think what we’re seeing most commonly there is companies are forming a working group or a project team that really is assembled with constituents from all over the key areas. Outside consultants also can help support that team but I think what we’re finding is a kind of critical success factor is really ensuring that there’s a clear project sponsor that will make decisions and will escalate issues that need feedback from company senior management. From the perspective of the ongoing process, this also needs some consideration now since there will be additional data collection, reporting and even analysis that will equate to more work for the company go forward. Elements for the ongoing process will impact lease administration, accounting and finance but could also have impacts to groups such as real estate, legal or even operations. Being complaint is not optional, as we’re all aware, and it’s important to prepare everyone to know exactly what they should expect once this gets into a steady state.
Okay, let’s turn our attention to the system’s side of the compliance equation. And let’s refer back to that CBRE PWC survey I talked about earlier. According to the survey, most organizations today obviously have both real estate and non-real estate leases. 45% of the organizations had more than 100 real estate leases and 55% of the companies had more than 100 non-real estate leases. And obviously, under the new regulations considering embedded leases and all that, the number of leases actually are kind of going to balloon even above and beyond that. So obviously, everybody needs a system to manage 100’s if not 1000’s of these leases and according to that same study, upwards of two-thirds of companies today don’t believe that their current system has what it takes to be compliant. So they’re either enhancing that or in many cases, swapping out to a completely new system. So that kind of brings us to the key question is what systems do you have to manage leases today and how do you need to look at that under the lens of kind of the new compliance that’s required?
Yeah it’s a good point, Bart and I think as you mentioned, there’s kind of different groups of leases and I think what we’re finding with our client’s is there’s different answers relative to what type of leases we’re dealing with. So, kind of starting with the real estate leases, this is typically the known commodity, so to speak. These are commonly in a system, fairly well organized and most of the data is there for the client’s that have 100’s if not 1,000’s of real estate leases. Where we see kind of the data break down is really around the non-real estate leases. This is a blind spot for most organizations so, you’re probably not alone if you’re experiencing the same, even identifying where those exist, who owns them, the spreadsheets that are the “system” for those type of leases.
All of that is common place. One other trend that we’ve also seen is in the case of an example like a fleet of vehicles, it’s often that third party vendors even manage that on behalf of companies meaning they don’t even have the data, they don’t have direct access to the data, they’re kind of a little bit out of sight, out of mind so, there’s some interesting considerations looking at some of the non-real estate type leases. I think that kind of the third group and the embedded leases is also an area and it’s really contingent upon how your business operates but if you’re doing a lot of service contracts that potentially have leases embedded in them, this is going to be quite a time consuming event because really that lease data will not be in a system. Somebody will be reading these contracts, determining if there’s an embedded lease and obviously kind of abstracting the data accordingly.
And what you’ve seen out there is one of the problems is even if you do have a system today that manages real estate leases, now you need to look at these other types of leases and you know, it’s a square peg, round hole kind of issue where maybe the data can’t be captured or doesn’t have a home. How do you typically handle that and bring that into a new system for non-real estate leases?
Yeah, I think it’s frankly something in the past a lot of the system’s didn’t really focus on non-real estate. So the capabilities just weren’t there to handle some of the nuances so I think that’s one element of it. Second is, there’s an organizational element to this, right? Non-real estate leases are commonly managed by operations, they’re distributed in nature, it’s not kind of centrally managed, centrally paid, centrally administered so, you know, there is some challenges around that. I think what we’re finding and you know, what we’re putting forth as a solution as really kind of looking at all the leases in one place and that being the best structure go forward but it does assume that companies are going to centralize that or at least bring those users of the non-real estate information into a system that potentially they didn’t have in the past. So there is obviously some organizational elements of this in addition to just simply the data.
Okay the last question I wanted to talk through is, you know, a lot of companies in what I’ve heard in the marketplace in talking with different folks is they’ve jumped in head first into the deep end of that road to compliance and quickly they realize they need some help and that takes form across multiple dimensions. The first of which is really around the regulations themselves and interpreting them and determining kind of the policy because there are some interpretation and some strategy behind setting policy.
And I guess I would first add, Bart, that everybody needs help. This is not something that any company can go at alone. Specifically to interpreting the regulations, knowing what the standards should look like, adopting that for your particular company. You know, this is where we would typically see audit firms or technical accounting resources. You know, these are the people, this is their full time job, this is what they know and those are the resources that are going to kind of bring you along through that process.
Okay that makes sense. And as we discussed, data is a big issue and I remember in a recent CFO article, they cited that in order to calculate the new accounting standards, you need up to 75 data points per lease times the hundreds and thousands of leases. So data where it resides in legacy systems and how you get it into a compliance system arguably is one of the most complex if not, the most complex in risk element within this so what about that?
Yeah, data’s always unique and it’s something that everyone is concerned about. Here at Tango, we’ve approached this … we believe in kind of a unique way in that we’ve built a whole discipline and strategy around the data itself. Specifically what we’ve done is really look at this relative to what is the data we need, how are we gonna ensure the quality and completeness of that data and tell client’s where they’re issues with the data. I think it kind of goes without saying, everybody thinks their data’s okay until we tell them otherwise. So what we need to do is kind of systematize that process, which is what we’ve done and allow it to accept data from any type of system or manual process be it spreadsheets or some other lease system that may be in place today but in order to really get it into the system in a clear and consistent way, it has to start with getting the data and it’s quality and completeness kind of back in the client’s hands to know what we’re really working with.
Right. And that kind of begs the question around the implementation of a compliance system and what type of partner you need, what’s the DNA of that type of need?
Yeah and I think this goes back to the first thing we started with, which is the time we have left and time is definitely a consideration in this. What is critically important is that your implementation partner is sensitive to the time and has a methodology and a process that maximizes the time, helps bubble up key issues so those are addressed immediately. Helps you with prioritization. There’s clearly many things that can be done as new leases and new systems are implemented. You know, how do you prioritize? How do you figure out what needs to be done versus what’s a nice to have so you know, that is really what we see as a critical element is really just ensuring that the partner that’s selected for the implementation knows those considerations and can kind of work with your company most effectively.
That makes sense. There’s a lot of change here, right? So we talk about all these different parts of the organization that are impacted that typically haven’t been in a leasing area so lease accounting, lease administration, legal, financial reporting, IT, tax procurement, you name it, every department is engaged at some level so that typically screams change management. How do you take the organization and all these different groups, bring them together to transition to being compliant and then kind of operationalize that, go forward so talk a little bit about some of the themes around change management here.
Yeah and I’ve been to a lot of project kick offs and I’m always most excited when I walk into a company and one of the people sitting around the table is a change lead, right? So there are some organizations out there, I think a minority that really value this and appreciate how the disruption to current state is a big deal and if you don’t manage that effectively, you know, that doesn’t bode well for the success of the project. So that is an outlier in terms of having dedicated change management organizations. However, I think every organization needs to put forth a resource or a lead that is responsible for that change. So it needs to be documented, you know, basically current state versus future state. There needs to be an understanding relative to what’s the future state organization look like? Is this change roles and responsibilities? Is there accountability to the data that goes into the system that then you know, feeds the calculations and all of the security associated with that? So, our objective here in advisory role is really to help clients understand what those elements are relative to change and make sure somebody is really focused on identifying that and kind of working through that process with us.
Absolutely. Alright well that wraps up today’s podcast, Think Before You Act, and today we talked about a lot of different subjects and themes that are kind of throughout the whole road to compliance. So, thanks for joining us today and we’ll go deeper into these topics in subsequent podcasts.