Liz on Leases – Choosing the Right Software for Your Lease Population
In this installment of her Liz on Leases Q&A, DHG Audit Innovation and Methodology Partner, Liz Gantnier, shares best practices for companies choosing a lease accounting software to help them with adopting the Financial Accounting Standard Board’s (FASB) new standard, Accounting Standards Codification (ASC) 842, Leases. Here is part three of Liz on Leases.
Q: Why does lease accounting software get its own episode in our series Liz on Leases? Aren’t the software products all the same?
A: No. All lease accounting software is not the same and that is why it is our focus in this episode. Deciding if software is needed and selecting a software solution is a critical element of success in this journey - it must be vetted just as carefully as any other outsourcing decision.
Q: But why is that vetting process so involved?
A: Over the last couple of years, additional lease accounting vendors have come on the scene, which is great because it gives businesses more choices. With more choices, you should try to find software that dovetails into your current system the best. Perhaps the first thing to do is to understand your own system and the quirks of your lease population. For instance, you may have a particular characteristic of your contracts that you need to be sure your software vendor can manage. For example, you may have leases denominated in a foreign currency. Once you have your arms around your particular needs, you can narrow down your choices based upon the types of contracts that you enter into instead of focusing solely on what the software is designed to address. That is, focus on what you need, as opposed to what the software does. If you have software that provides you 850 bells and whistles and you only need five of them, maybe you don't need to pay for the capabilities you’ll never use. Perhaps there are alternative choices of software that better meets your needs.
Q: Understanding how your staff will interact with the software should also be a consideration, right?
A: Correct. There are several push/pull factors that will determine the value of the software you choose. What processes do you currently have in place? To what extent are you going to have to re-engineer your processes to integrate the software into your system? In a perfect world, the new software should bolt on to your existing system and processes. For example, if you’ve historically managed your lease population in the location that the lease is related to – you’d want the new system to accommodate that without a total process overhaul. Interestingly enough, some companies know that a total overhaul is needed and have been putting off evolving their systems and processes in anticipation of the new accounting requirements.
Q: What should you look for in a vendor?
A: I would analyze them as I would any outsourcing decision. How long have they been in business? How many customers do they have? Are they specialists in the kind of leases in your portfolio? Can they provide a SOC report regarding their processes? I would, of course, source references, particularly from your industry, companies of similar size, volume or type of lease. I think you’d want to talk to companies currently using the software in a way that is close to how you would utilize it. I would ask about specific scenarios based on size, the makeup of your portfolio and your industry. For instance, provide an example of each of your primary lease types. Have the vendor show you how the software works with those examples. How does the interface feel? Does it feel like it fits your portfolio and how you work? To your question about matching the right software to your staff, ask what training is required. Can my people easily adapt? Is training included in the fee? Does the cost provide a commensurate amount of value?
Q: Speaking of expense, how do you know what software program provides the best value?
A: First, I would determine the software’s fee structure. It might be a “per lease” fee based on the number of leases - if you have a thousand leases in a particular category, you may not want to pay per lease. Other structures could be based on the number of users or concurrent users, flat rates, etc. Because pricing structures differ, you will want a clear understanding of the pricing structure so you can compare what they are offering with what you need. You might find that to get to the right value, some work may need to occur “outside” the software – such as maintaining spreadsheet schedules. This might reduce your costs for the software but increase the time and effort of your staff. And, I might add the need for additional internal controls over those “manual workarounds.”
Q: Given that businesses should be working on their lease accounting strategy now, are any of these considerations more important than the other?
A: That's hard to say and is going to depend upon your particular circumstances. In some cases, price may be the deal-breaker, or the SOC report. It's difficult to say that any one of these trumps all the rest, but I think that if you find that the software vendor doesn’t have any other customers in your particular industry, and your industry has unique aspects as to how business is conducted, that would be an important consideration.
Q: Let’s talk more about the software itself. What are some of the aspects of the software that companies should keep in mind?
A: I really do think that the feel of the software is important – which is entirely dependent upon what your portfolio looks like. Does it feel like a good fit for your company, your leases, your people, your processes, your systems? You might be both a lessor and a lessee. You might need ongoing accounting – not just the transition adjustment. Study the software as much as you can. Does the software accommodate the concept in the standard of underlying class of asset – necessary for some of the standard’s practical expedients? How does the software handle variable or contingent rents? What about lease versus non-lease components? What if there are multiple lease components? Down the road as contracts are amended and reassessment events occur, how does it handle those occurrences? Does the software provide financial statement disclosures and calculate such items as weighted average interest rate? Does it have sufficient controls over data entry? Will it allow for multiple persons to be in the system at the same time, and how does it restrict access so that confidentiality of agreements is limited to the proper few? Lastly, does it pull from any third-party databases (such as treasury rates) for ease of use?
Q: How important is it that I have a good understanding of my lease population?
A: Understanding how dynamic your portfolio is will be an important consideration because it will impact your ongoing operations. What information are you going to need down the road? Does the software retain historical data? Does it create an audit trail if there are changes to the lease over time? Does it retain the documentation that you need within the software?
Q: The software being able to retain documentation brings up a good point. What about the vendor’s information security processes?
A: Yes, that’s very important and it could be part of the SOC report. Take a look at that report for any recommendations about controls you should maintain. You will want to know if they’ve had any security breaches, how they found out about the breach and if client data was compromised. This information should help you determine how integrated you want this solution to be with your own processes and systems.
Q: What’s on tap for Liz on Leases IV?
A: We are going to explore what information you need to get started on implementing the standard and the many decisions that must be made to transition to ASC 842. You’ll need this whether you choose a software solution or decide to manage in-house. The first thing a software vendor will do is send a questionnaire. Let’s get our answers ready!
Contact us to discuss your lease accounting implementation needs and subscribe for our next Quarterly Perspectives webinar where we’ll cover various financial reporting and related matters.
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