As we head towards the 2021 version of business and social normalcy – leveraging our health, safety, and economic viability, we are beginning to see the rush towards compliance. There is a lot of work to do, as the compliance deadline for companies is December 15, 2021 – less than seven months away, and most have not figured out the long term strategy, nor how the mandated compliance requirements will affect the process, workflow, security and data analytics both upstream and downstream. Achieving compliance is just a piece of the overall lease accounting, lease administration, and lease management solutions that need to be in place for the December 15th compliance mandate.
While many are grappling with the integrated impact of a compliance transformation and operating in the new world order of having to meet compliance requirements as a general cost of doing business, we wanted to take a moment to share the tangible and intangible impacts of ASC842/IFRS16 – Compliance Fallout. Deciphering the complexities of compliance is beyond a full-time job, and understanding the risk that is caused by not achieving compliance, requires deep expertise from an EBITDA, Revenue, Fines, Penalties, Branding, Market Share, Reputational Damage, PR not to mention the cost to Remediate and the crushing compliance burden on business agility.
The need for speed, as in business agility has never been greater – which impacts businesses looking to make a move at growing their business, extending their product/services differentiation as well as redefining their business processes to integrate automation and avoid future Covid related shutdowns which disrupt revenue, growth, employees, and customers. Missing out on the opportunity to enable compliance, leverage automation/cloud carries a significant opportunity cost, which will create marker flexibility obstacles that will reduce business growth and create an uphill battle in your given market. Simply put, Operating leases will move on to the balance sheet – and the compliance fallout is still a huge risk item to virtually every business sector, because of the impact on your enterprise, as well as your partners, suppliers, vendors, and participating corporate subsidiaries.
The vision of what the true cost of compliance fallout is, requires a team of business leaders from every department, doing in-depth modeling as to how to best proceed within a compliant business model, as well as what are the ancillary costs of not achieving this compliance, and how to best mitigate the messaging across the partner and customer eco-systems.
The value of enterprise data is also an inflection point for companies, as they try to remain secure from a cyber perspective, but also need integration, controls, and processes to help support compliance and the overarching reporting requirements.
ASC842/IFRS16 – Risk reduction techniques
Obviously, achieving ASC842/IFRS16 compliance is the best risk abatement strategy possible, if you are looking to avoid fines and penalties – but an even greater benefit of compliance is in the agility it provides the company. You are not going to be part of a merger, an acquisition, a divestiture, or an IPO – if you are not compliant. Few understand the limitations of non-compliance, but all understand how a limitation of this magnitude can dilute any corporate performance excitement, or help to retain top talent. See our checklist of related leasing strategies.
ASC842/IFRS16 – STRATEGIC GUIDANCE
There are several strategic decisions to be made, as you seek to put in place your compliance strategy, which is frequently overlooked as companies respond to compliance pressures, in an effort to do-it-yourself (DIY). These oversights are commonly missed, primarily due to underestimating the complexities of ASC842/IFRS16 compliance, organizational impact, data requirements, and the lack of technical accounting expertise.
The core of the ASC842/IFRS16 compliance mandate is built around the reporting of long-term lease liabilities, and the new reporting requirements that are now required to be represented on the balance, whereas prior – these were simply footnotes on the balance sheet, which presented limited exposure.
What is the Technical Accounting impact on Lease Accounting Transformation?
The financial implications of misstating EBITDA is a high visibility requirement that needs to be addressed by a technical accounting expert, along with a Leasing expert as part of an overall Lease Management strategy. The audit remediation costs, fines, penalties as well as business impact are all related to the criticality of this important compliance requirement. This was the intention behind creating this guidance, aimed at protecting investors, which is the ‘why’ behind the disclosure statement and SOC1 reporting for all operating leases.
Free overview of how reporting/EBITDA and lease management play together:
ASC842/IFRS16 – THE DIGITAL LEASE JOURNEY
The journey into compliance is just that – a journey into the evolution of your organization’s operational processes and business maturation. The benefits of achieving compliance are primarily cash – the ability to get credit, of which compliance is often the litmus test for lenders, as they understand if you’re not compliant, you’re running an unsustainable business – so you are not going to get favorable terms – if any, by being out of compliance. The other challenge of not achieving compliance is the dilution of business value in terms of mergers and acquisitions, as nobody is looking to acquire a business problem with a lack of compliance. New IFRS and U.S. GAAP lease accounting rules clearly impact M&A Transactions, Jones Day.
In reviewing the customer lease compliance journey below, you will see that compliance is a true business enabler and that success begets success from a business evolution perspective. These are common building blocks, but with each step forward, you are creating business flexibility, access to cash, and operational flexibility – which is both a requirement for growth as well as from an investment perspective.
Hidden CASH/Business Agility Opportunity
The diagram below is the Leaseology service funnel, and we will use this model to help communicate the comprehensive value delivered by a company and supporting community, to identify areas of opportunity, that is not clearly recognized as instrumental to the Lease Compliance mandate. It is a fantastic time for visionaries – let us help you drive your transformation:
- Immediate Lease Compliance – Multi-faceted benefits: ‘Packaging’ Achieved, so that you can be part of investor strategy discussions. Evergreen leases identified and rectified, so you will not waste any future spend on obsolete or non-existent leases. Data – Industry 4.0 benefit – speed, predictive/operational analytics are all components that partners/suppliers and vendors want – and will pay for, as it helps their planning cycle and helps them to reduce inventory/cost. Lastly, compliance fines, penalties, and unnecessary audits can all be avoided.
- Critical Date Notifications – Automation and Industry 4.0 integration provides advanced exposure to equipment malfunction, materials depletion, and building security/operational issues – so that you can plan and not respond to issues in a reactive way.
- Lease Administration – Ensures ongoing compliance, security, process efficiency in addition to avoiding any unplanned disruptions of business operations, thanks to Industry 4.0 data visibility.
- Disclosure reporting – Assures financial reporting accuracy, supports the compliance mandated requirements, and can now tie into real-time, device-specific status/performance – so disclosures can roll up into a more sophisticated asset trending report – further optimizing planning cycles.
- Technical Accounting – this is where the biggest risk lies, EBITDA ingestion and SOC1 reporting. While you still need a technical lease accounting expert, visibility into lease analytics creates a potential tiered approach to asset value as well as provides depth and scale to amortization and depreciation schedules.
- Lease negotiations – On the equipment side of the equation, this is simple – as you can leverage asset performance and proactively massage terms you’re your partner/supplier/vendor – based on actual performance metrics. On the real estate/building side – now is the chance to innovate and create automation around building security, energy efficiency, staffing – leverage industry 4.0 to maximize your lease expense investment and reduce your insurance/utilities, security costs.
- Document Management – An organizational checkbox to centralize lease-specific documentation. The opportunity to add in workflow and automation around the lease the management of the lease as a service – providing lease accounting customers with layered lease depth and visibility, delivered through automated data capture and analytics. Leaseology can help you to ‘know your business at a more intimate level.
Read more on ASC842/IFRS16 Lease Compliance – Industry 4.0 Impact
Why are people looking at ASC842/IFRS16 – COMPLIANCE FALLOUT
We are in a time of great challenge and opportunity. Although Covid has expedited the pace of change, it has created an environment where the agile are handsomely rewarded. Lease Compliance evolution is the backbone of business flexibility and needs to be addressed as such. This is why customers are reaching out to Leaseology to help identify automation opportunities as part of an overall lease management approach.
ASC842/IFRS16– COMPLIANCE FALLOUT
Key Takeaways:
- Your business reputation, your corporate branding, and messaging – all have strategic value, protect your name and your partnership ecosystem by developing an integrated Compliance Strategy
- Fines and Penalties are the easy part of an unsuccessful Compliance audit – the remediation, rework and audit fees will dramatically reduce business flexibility and reduce corporate agility, which will magnify executive concern.
- Winning organizations understand the opportunity at hand. At Leaseology, we can take the sting out of this complex compliance obstacle, and create a modernized approach towards evolving your business
Leaseology understands what internal lease accounting teams are up against, and has architected an end-to-end solution that allows customers to divert resources, remove cost, increase accuracy/locate cost savings opportunities – all while achieving compliance via an outsourced lease management process. The seven service pillars are the core of the Leaseology service offering, and we are confident that our combination of industry expertise in lease accounting, compliance, reporting, and automation can help you meet the ASC842/IFR16 compliance requirements.
Leaseology, Inc is a North America-based business advisory services firm committed to accelerated marketplace adoption of digital technology, financial management innovation, and business operations practice excellence. These core competencies apply to real estate and equipment portfolios.
