Public companies have significantly changed their financial processes in the past year and are not done yet, according to data released last month by Deloitte.
Over 1,000 public company C-suite and other executives were polled in April about financial process revisions/remediations during a Webcast by Deloitte’s Center for Controllership. More than half (59.1 percent) said their organizations had significantly revised or remediated financial processes during the past 12 months, and 51.6 percent expect to continue remediations in the next 12 months.
“The top reason driving those results was process changes needed as a result of implementing new technologies in the accounting function in general, like process changes for ERP (enterprise resource planning) systems, migration to the cloud, and automating manual processes,” said Sean Torr, Deloitte Risk & Financial Advisory managing director.
The poll found complying with new and updated accounting standards can have “unintended consequences.” Of those surveyed, 23.8 percent expect adoption work on standards like leases, revenue recognition, and credit losses (CECL) to require remediations to their financial processes.
“Adoption of accounting standards in the last few years required new technologies and tools to get data and perform calculations,” said Pam Duzik, Deloitte audit and assurance partner. “Some companies changed technologies upfront, but some had to adapt quickly and continue to refine their processes after.
“What all the major new standards have in common is they require a lot of data, and there is a need for significant judgments. They require financial processes changes to make the financial close process quick, more easily executed, and sustainable post-adoption.”
Regarding revenue (Topic 606), financial processes might need to continue to change as business models change. “There has been a rapid transformation of companies in the last 18 months, with different opportunities and revenue streams; changing assumptions; and nonrecurring transactions, like mergers and acquisitions and divestitures,” Torr said. He noted companies have implemented new revenue technologies and tools, which is causing them to relook their revenue policies and practical expedients.
Similarly, many public companies have already implemented changes to lease accounting (Topic 842), but financial processes are still evolving.
Meanwhile, COVID-19’s disruptions to historical operations and markets has created new challenges for making estimates and loss assumptions when adopting CECL (Topic 326). “No model could accurately predict what historical disruptions mean for accounting today,” Duzik said. “The CECL model creates new complexity, and COVID was added on top of it.”
For implementation of all the new accounting standards, Torr observed companies are struggling with resource disruptions because of the pandemic, including employee turnover and the loss of legacy talent and experience.
“It is a unique time in controllership and finance areas,” Torr said. “… This is probably why we are seeing survey results that are so high. The next logical question is what can companies do to prevent or respond to events efficiently and effectively?”
Duzik said her clients are still thinking long term and not just about getting through new accounting standard implementations. “They are considering what the business needs, how to respond to evolution in the risk landscape, new transactions, changes in technology, and what controls and processes are needed to prepare for different scenarios in the future,” she said.
Leases compliance remains work in progress
Despite the extensive changes that can be required, many companies are not far along in preparing for the leases standard. The effective date for private companies is for fiscal years beginning after Dec. 15 of this year.
Visual Lease, a provider of lease optimization software, recently surveyed over 500 senior financial and accounting professionals at private companies with more than 1,000 employees about their compliance with the standard and what their opportunities and barriers are. The “2021 Lease Accounting Market Analysis” report showed 75 percent of survey respondents are not yet fully compliant, with 46 percent less than halfway through implementation or not yet started.
Contributing to these findings is many private companies have had their progress delayed by the pandemic (43 percent), while others are lacking the people, tools, and technology needed (36 percent).
“Everyone has been talking about the lease standard for a decade, but there have been starts and stops, including the pandemic,” said Joe Fitzgerald, SVP of lease market strategy at Visual Lease. “Everybody has a day job, so when new standards come along, people have to find time to work on implementation.”
Of the respondents, 42 percent indicated the implementation process is taking longer than expected.
“Unlike revenue recognition, which was accounting-centric, the lease standard is anything but,” Fitzgerald said. “It involves real estate, IT, and procurement. It’s important to assemble a team; identify a lead; and assess the current versus future states and any gaps, because needed processes may not be in place.”
Those surveyed recognized the importance of a software solution, with 48 percent implementing new lease management and accounting software and 51 percent upgrading their existing options. Fitzgerald observed although many companies had some technology for real estate leases in the past, they did not use technology to account for equipment leases and instead utilized Excel spreadsheets.
“This static approach will likely not work anymore because leasing is dynamic, and lease modifications now have to be monitored and accounted for,” he said.
According to Fitzgerald, implementation activities likely require process changes or new processes that did not exist before. These include identifying the entire lease population, reviewing embedded leases, extracting data from lease agreements, and developing assumptions for incremental borrowing rates and renewal options. Disclosure requirements are also substantially greater.
In addition to being compliant by the effective date, there are challenges to staying compliant for ongoing accounting. Nearly all respondents (99 percent) expect difficulties, with the most anticipated challenges being accounting for and managing lease modifications, applying new technologies and processes, and staff training.
All those surveyed recognized complying with Topic 842 will bring their companies substantial benefits, including cost savings, easier audit preparation, and better information for making business decisions about leases. Despite this finding, 21 percent indicated full compliance with the new standard is a low business priority.
“Finance needs to socialize to other departments that lease accounting is coming and personalize it to show why it’s important and relevant to their functions,” Fitzgerald recommended.