We are all seeking to get through the end of 2021 – healthy, safe, and compliant. There is a lot of work to do, as the compliance deadline for companies is December 15, 2021 – just eight months away, and most have not figured out the long term strategy, nor how the mandated compliance requirements will affect 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.
Like a college term paper, many will wait until the night before and cram a bunch of lease data onto a spreadsheet, and slip in just under the deadline. For these companies, the ongoing maintenance of compliance via a spreadsheet is going to create a new job – that of a data miner, sifting through legacy lease obligations, and manually creating disclosure reports. This is a missed improvement opportunity, but not approaching the lease accounting solution as anything but an enterprise solution, is also a short term, miss on an opportunity to modernize your operations, increase agility, transform process through automation as well as use your data as an analytical driver for forecasts and trending. ASC842/IFRS16 Lease Compliance Risk and Reward is the recognition of the enterprise transformation that is required in order to achieve and maintain an ongoing compliant lease accounting operation, identifying risk elements, how to avoid them as well as the upside to being compliant from a business capability and agility perspective. In order to understand the magnitude of the overall business impact of achieving compliance, we would like to break down the challenges both direct and indirect of what is required to meet and achieve compliance.
Indirect Challenges:
With corporate America experiencing a 76% gap in the perceived required skills and the skills currently employed, taking on a new business initiative such as developing an enterprise compliance program with existing resources is a recipe for an unpleasant experience. We use the word ‘perceived’, as this is based on the current skills gap, not to mention with business velocity at an all-time high – what will new skills will be required in the next 12-18 months, as new services, subscriptions, compliance mandates, and platform integrations will become prioritized needs in the very near future.
Balance Sheet ingestion of lease compliance affected equipment/real estate – this interpretation can dramatically influence a companies evaluation, which is why experts with extensive lease accounting experience are in your best interest – trying to develop an EBITDA model with an accountant is not going to get you there – you need specific skills, which are rare. Technical accountants live in the compliance world and will pay for themselves many times over in audit cost savings, correct financial reporting, and not having to do balance sheet re-work.
Cybersecurity – this is an area of unprecedented concern, as security is the top concern of CEO’s (outside of the Pandemic), and is basically a category of its own, with Malware, Encryption, Denial of Service, Physical security risks, Cyber Hackers, and ransomware – this is an area that requires experts and investment. Developing a manual, Excel-based, or extending an existing platform to create a compliant lease accounting process, is wrought with risk, as typically the Finance leadership is not fully up to speed on the massive threats lurking in Cyberspace.
How concerned are you about these potential threats to your organization’s growth prospects?
(Showing only top ten ‘extremely concerned’ responses)
Source: PwC Annual Global CEO Survey
Note: ‘Pandemics and health crises’ was last included as a threat in the 18th Annual Global CEO Survey
Direct Challenges of lease Compliance
The diagram below is the Leaseology service funnel, and we will use this model to help identify areas of direct lease compliance and organizational challenges as part of ASC842/IFRS16 Initiatives:
- Immediate Lease Compliance – Do you have an enterprise strategy in place for how you are going to achieve compliance, including lease management, reporting, EBITDA transformation – with a resource matrix for who’s doing what, with roles and responsibilities, data governance, security, application integration requirements with upstream/downstream systems of record identified? Underestimating the complexity of this is a fatal mistake.
- Critical Date Notifications – In order to provide your business with critical data notification, you first must audit all of your leases, extract pertinent lease details, develop a schedule around each of the lease specifics and then get your data into a breach-proof repository, that is aligned with a subscription to the latest compliance mandates, then develop a support mechanism for maintaining your lease portfolio.
- Lease Administration – Do you have a strategy and supporting design of your processes and systems that ensures ongoing compliance, security, process efficiency, date, and reporting compliance?
- Disclosure reporting – Do you have the appropriate resources, process, and supporting mechanism which assures financial reporting accuracy, provides an easy to modify existing lease data, and supports the compliance mandated requirements – so disclosures can roll up into a more sophisticated asset trending report – for forecasting/trending executive analysis?
- Technical Accounting – this is where the biggest risk lies, EBITDA ingestion and SOC1 reporting? These are rare skills, especially as the deadline approaches – expect rates to triple for Technical Lease Accountants before year-end.
- Lease negotiations – Do you have an expert on staff that knows the exact status/FMV of your current lease portfolio needs? Do you have an expert negotiator, to help you whittle away at unfavorable terms? Do you have a lease compliance attorney on staff to help discern contract specifics? Your partner Leaseology does.
- Document Management – An organizational checkbox. This is a strategic issue, as, without a corporate data governance strategy, you are probably guessing as to the whereabouts of your lease portfolio, which is typically in a combination of digital and physical archives. Leaseology can help you to ‘know your business at a more intimate level.
ASC842/IFRS16 – Lease Compliance Risk & Reward
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. Across the globe, annual corporate spending on compliance is estimated to be about $270 billion per year. And, with 45 new regulatory-related documents issued every week, compliance costs are on track to account for 10% of global revenue by 2021, a 6% increase from 2020.
A recent Accenture survey revealed that while 87% of survey respondents expect investment in compliance to increase, a sweeping majority report they are targeting compliance cost reductions of more than 10% over the next three years. This means compliance is facing a widening gap between external demands and internal capabilities.
While, at the same time, business leaders are hard-pressed to manage the consequences of an unprecedented pandemic. They must constantly adjust to the evolving needs of employees and customers—all while navigating ever-changing operational and financial challenges.
Those that achieve compliance – will have options, both from investors and acquirers. They will also have the ability to focus on their core business, be able to address the growing skills gap as well as avoid compliance-related business distractions around audit, reporting, and re-work.
Reinvent the compliance function
It’s clear that traditional approaches to compliance no longer work. Instead, compliance leaders need to proactively identify new risks and support sustainable business growth by redesigning compliance operations for the future.
As compliance’s role shifts from being reactive to strategic, its responsibilities are expanding to include risk management and enterprise-wide advisory services. To succeed, today’s compliance officers must:
Why Solution Architecture is so important to ASC842/IFRS16 Compliance?
Technology is driving business change, and in order to compete – you must maximize your alignment to business process, data, resources, and systems, as the payoffs are highly attractive to those that ‘get it’. The convergence of all of the supporting factors is a huge challenge to compliance initiatives – and a great reason to talk with a team of experts, as no human has all the answers to solving this challenge. Innovative providers such as Leaseology, have a team of domain experts that can simplify your challenge, easily and quickly.
ASC842/IFRS16 Lease Compliance – Risk and Reward
Key Takeaways
- Resource gaps are beginning to impact corporate America – the skills required to design, deploy and maintain a compliance program are multi-faceted, best bet is to find a partner that understands this and can help you in a comprehensive solution
- Year-end will soon be upon us again, do you have a lease compliance strategy in place? Do you have a Technical Accountant? Do you have a solution architect? LEaseology does.
- The compliance game is going to rapidly expand, now is the time to apply your vision to where the industry is going. Doing this as a response is smart, doing this as a reaction is going to be painful. Call Leaseology 888-
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.
