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Accounting

COVID-19 Underscores the Need for a Better Lease Accounting Approach


by Imran Mia

Long before the virus disrupted normal business operations, industry analysts noted the problem companies were having with their lease accounting approach.

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The COVID-19 outbreak is first and foremost a human tragedy, but the measures to contain it have also created unprecedented economic disruption and companies are scrambling to mitigate bottom-line damage. To compound the issue, a lack of modern lease accounting capabilities makes it difficult for many businesses with large lease portfolios to regain control, improve liquidity and plan for the future.

The COVID-19 crisis didn’t cause inefficiency in lease accounting; the deficiencies already existed. However, like many business issues, the pandemic has underscored the seriousness of the problem and made solving it all the more urgent. There’s never been a better time to modernize lease accounting by automating processes and improving accuracy. This will help companies manage the COVID-19 fallout.

Spreadsheet Use Results in Missed Compliance and Optimization Opportunities

Long before the virus disrupted normal business operations, industry analysts noted the problem companies were having with their lease accounting approach. A PwC survey from 2019 found that many companies are still relying on manual processes, and lack “the right tools and data and analytics” that could help them “reduce lease costs and better manage risks from leasing.”

And according to a 2019 KPMG survey, almost one third of companies in the Americas are still using spreadsheets to drive lease accounting standards compliance. The survey shows how manual processes hamper efforts to comply with standards. In this new reality imposed by the pandemic, the use of spreadsheets and the resulting data silos will result in missed opportunities to minimize loss and maximize value.

5 Critical Lease Management Points Technology Can Address

Even though manual lease accounting isn’t a new issue, the most ferocious bear market in recent history makes it imperative for companies to address them now. Accurate financial statements and disclosures are not only required for compliance but needed for companies to capture quality data to plan for temporary or permanent location closures, supply chain disruptions and liquidity strategies. Here’s how a modern software strategy can help:

  1. Lease portfolio visualization: This should be the first and most important task for all companies to undertake. Being able to see the lease portfolio represented geographically and identify cash flows is always essential, but it’s especially important during a crisis when companies need to make fast, informed decisions. Having visualization capabilities in integrated lease portfolio management software brings accurate data and geographical information together, allowing the finance team to create “what-if” models to enhance decision making around sustainability, planning, compliance and scalability.
  2. Impairment/abandoned assets: This is possibly the most critical event companies need to be taking into consideration because it will be the most prominent change to account for and has immediate consequences. Since the pandemic has severely disrupted businesses and caused widespread closures—some temporary and others permanent—the ability to accelerate depreciation or seek modification as soon as possible is vital. Appropriate technology allows finance teams to get their arms around the issue by determining lessor obligations and applying impairment/abandoned asset remedies as appropriate.
  3. Discount rate/lease modification: Fiscal and monetary policy directly affects discount rates, and companies using spreadsheets to manage lease portfolios have to manually update IBR changes. That’s an onerous task under normal conditions, but in the middle of a financial crisis with governments taking action to lower prime rates that affect the terms for multiple leases, the ability to automate interest rate updating becomes imperative rather than a “nice to have.”
  4. Financial planning and analysis (FP&A): No one forecasted the pandemic, and no one knows for certain when the business disruptions will end. As Anthony Fauci said, “You don’t make the timeline, the virus makes the timeline.” That’s why businesses need FP&A dashboards so they can visualize real-time cashflows and capex, account for market variables and negotiate to reduce outflows when appropriate. Business intelligence tools can’t provide real-time data, whereas lease accounting software does.
  5. Early terminations and lease renewals: Aside from impairment/abandoned asset decisions that are the likely fallout from the pandemic for lease management, early termination and lease renewal decisions will be among the most critical taken. Lease management software simplifies access to crucial data on termination clauses and renewal dates for negotiation purposes. It also enables reporting to enhance lease portfolio management.

Update from the Accounting Standards Boards

The Financial Accounting Standards Board (FASB) reacted from COVID-19 by providing updates on certain lease accounting facets. On April 9, 2020, the board voted to offer a one-year deferral proposal on the effective date to adopt ASC 842, for private companies, private non-for-profit (NFP) companies and certain public NFP companies that have not yet issued financial statements. Furthermore, companies now have the exemption allowed by both FASB and IASB from assessing whether a COVID-19 related rent concession is a lease modification. On April 14, 2020, the Government Accounting Standards Board (GASB) proposed postponement of the effective date of GASB-87 by one year.

Taking Control of the Lease Management Portfolio

The PwC survey conducted after IFRS 16 went into effect last year indicated that a whopping 70% of companies that reported using specialized software still had to find manual workarounds. Less than 20% of those surveyed said they were using a solution that handled every aspect of lease management. That represents an unacceptable level of manual work, even in the pre-COVID-19 business environment.

The widespread use of spreadsheets and incomplete solutions is even more unacceptable today, when so many companies are fighting for survival, looking for ways to reduce cash outflow, and struggling to do more work with fewer people. Businesses with a lease portfolio need to give their finance teams access to all of the relevant data—in real time—so they can make the best decisions possible.

A software solution that allows finance to handle every critical lease management point is an investment. But when the costs of manual updates and ad hoc reporting are calculated in terms of time, money, and lost opportunities, it’s clear the benefits far outweigh the expense, and companies will be better positioned to thrive in a post-pandemic economy.

Imran Mia, Head of Global Solutions Engineering— Nakisa Lease Administration.