With greater than 15 years of expertise managing accounting and finance, Matt Waters is an skilled on FASB’s new lease accounting steering. Whereas at Dwelling Depot, he led the mission to consolidate knowledge for actual property, gear and different leased belongings right into a single division, which elevated effectivity for the preparation of monetary reviews, 10Ok footnotes, budgets and forecasts. FEI Every day spoke with Waters forward of in June.
FEI Every day: Inform me about your expertise at Dwelling Depot and the way you have been you in a position to handle the entire leasing knowledge.
Matt Waters: One factor I did at Dwelling Depot was to current a plan to consolidate all of the leasing knowledge from across the group. You possibly can think about there are 1000’s upon 1000’s of leases, every little thing from actual property to forklifts, vans and IT gear and copiers. Most firms fragmented lease accounting practices and the one time it actually got here collectively was for the 10ok footnote round leasing and that’s annually, and numerous occasions that’s simply Excel pushed.
We consolidated all that data into my division and it served a number of functions. One, it made the footnote course of, that annual 10ok course of, extra environment friendly. It additionally ready us to adjust to the brand new accounting requirements. There was additionally price financial savings ensuing from consolidating all that knowledge. An instance was we had 10,000 forklifts, however, as soon as we consolidated, we realized we have been paying for 15,000 forklift batteries. You don’t want that many further batteries. Issues like that began to return to the floor.
Final week we have been in New Orleans on the CEB finance convention with CFOs and controllers and chief accounting officers they usually’re asking issues like, “What was the most important factor that shocked you if you went by way of that means of consolidating this lease accounting knowledge at Dwelling Depot?” And “What are the coverage choices we have to make now to place us in a spot to adjust to the brand new lease accounting requirements?”
FEI Every day: What are the massive areas regarding preparers?
Waters: I believe knowledge is the primary concern after which, particularly, knowledge that we don’t find out about. Leasing has been dealt with as just about simply an expense on the P&L. It hasn’t been tracked. Corporations have their leasing knowledge fragmented out throughout the group. They’re managed on the division stage or the subsidiary stage or perhaps within the totally different nations that the corporate does enterprise. There isn’t a centralized repository or one supply to go to for leasing data.
A variety of occasions firms, whereas they may not have tracked leases throughout the board, they’ve a minimum of tracked their actual property leases. For leases which have been capital belongings, you possibly can look in your mounted asset system as a result of there was a capital portion that’s most likely recorded in your mounted asset system.
Individuals are designing surveys that get to the important thing knowledge components and the definition of a lease and ship it out to the individuals within the discipline and people may help determine the leases. For a public firm there’s one one that works in monetary reporting that manages the method of getting ready a leasing footnote on the annual report and that individual is a good place to begin to get an thought of the place the leases are. For greater firms, numerous occasions there’s a fleet of leased automobiles, so you may get leasing data from the precise distributors that lease these automobiles to the corporate. It’s simply an train find leasing knowledge that has not usually been tracked very nicely and simply getting it multi functional place. That’s what persons are actually scratching their heads about.
FEI Every day: One of many issues we’re listening to from preparers as they’re preparing for adoption is the problem of figuring out a programs answer that may assist. As firms wish to select a system, what questions ought to they be asking distributors?
Waters: That’s an ideal query. I hear that fairly continuously from my purchasers too. And I really went by way of the method at Dwelling Depot and one factor that I search for there a system that’s intuitive and consumer pleasant. Are you able to envision your workers logging into this day by day and it being considerably straightforward to navigate by way of? As a practitioner, I spent numerous hours in a lease administration system they usually’re not all created equal.
You get so many requests for data, so I believe an enormous benefit in a brand new system is the aptitude to do customized or ad-hoc reviews, even on the consumer stage. For those who can drag and drop fields and create your individual report and make it significant on the time, that’s an enormous benefit.
Look to see if it’s been endorsed by an accounting agency. Within the software program trade, you need to verify the monitor file of the corporate. A variety of occasions these firms get purchased and bought relatively shortly. You need an organization that has some energy, some substance behind it and you understand that the software program’s going to be round for years to return.
One other big one is updates. Software program firms promote you one model and also you join one factor. Many occasions there’s an replace down the highway. You have to get a superb image earlier than you enroll. How a lot is the replace going to price? Is it one thing the place you’ll should pay for an entire new, full-fledged implementation? Or are the updates included along with your charges? One other large one is, for any leasing system you’re contemplating, does it combine along with your ERP system? That’s an enormous concern.
FEI Every day: Preparers have been advised that the distributors have fixes coming. When ought to they anticipate to see these fixes and patches?
Waters: I believe software program distributors who you’d wish to take into account have a completely functioning system now. I believe patches, at this stage within the recreation, are a crimson flag. I’d wish to see a system that’s purposeful and able to go. Perhaps just a few issues that should be dialed in on a company-specific foundation, however so far as the performance of performing calculations underneath ASC 842, I believe a software program vendor ought to already be ready for that and also you wouldn’t hear a lot speak about already needing patches. It needs to be fairly nicely vetted.
FEI Every day: What are the accounting coverage choices that should be made at this level?
Waters: There’s a package deal of sensible expedients and you may elect to do it or not. It may well make it simpler for the corporate or it may make it more difficult. It’s issues like deciding whether or not or to not lump non-lease elements in with lease elements. The benefit of retaining them separate could be that it retains the impression to your stability sheet decrease so that you don’t have as excessive a legal responsibility if you set this up. The benefit of grouping them collectively is that it eases your administrative burden. You don’t should make calculations or estimates to separate out these lease and non-lease elements. That’s an enormous one which persons are interested by.
I believe materiality is a large one. The IFRS has a $5,000 greenback threshold, so for any leased asset valued lower than that quantity, you don’t should carry out the stability sheet calculation and therapy. The FASB didn’t prescribe a threshold greenback quantity, however did embrace particular language to permit firms to set materiality.
One other large one is the portfolio strategy. The portfolio strategy has to do with grasp lease agreements, or MLAs. Corporations have these agreements for leasing a lot of gear. For instance, an organization like Dwelling Depot would have numerous forklifts and these are lined by a grasp lease settlement. Now we have some steering round how one can achieve efficiencies grouping these belongings collectively, so that you don’t should have a separate amortization desk for each. It makes numerous sense for an organization to judge that forward of time and resolve, “Okay, how is my portfolio organized and might I choose up some efficiencies by grouping issues collectively?”
The very last thing I’ll point out is the brand new necessities to evaluate choices. Leases virtually on a regular basis, have choices to increase. So the brand new customary has included the language, “fairly sure”. For those who’re fairly sure to train an possibility, you’re supposed to incorporate that in your calculations and your amortization tables. That’s one thing that’s new and firms have to craft a coverage round how they resolve in the event that they’re fairly sure to train an possibility or not. And that’s not straight ahead. It has to do with numerous concerns, firm by firm, and what we are saying within the lease two totally different firms, you most likely get two totally different solutions. Corporations should be planning for these coverage choices and setting their coverage now. In lots of circumstances, even earlier than they begin the method of information gathering. For those who’re setting a threshold, you must try this upfront. That approach you don’t should go after these small greenback leases in your knowledge gathering course of and also you save your self numerous time and headache by beginning along with your coverage choices up entrance.