Nearing the end of their second quarter observing new lease accounting rules, many public company accounting departments are still cursing their software.
Most the accounting software solutions designed to help companies comply with Accounting Standards Codification Topic 842 are incomplete, says accounting educator Bruce Pounder, executive director and founder of GAAP Lab. Some of them deliver flat-out wrong answers.
The American Institute of Certified Public Accountants even called out software problems in an appeal to the Financial Accounting Standards Board to give private companies more time to adopt the new rules.
“Some of the third-party vendors that have developed solutions to assist companies in implementation of the lease standard have errors in their software,” said Michael Westervelt, chair of a private companies committee at the AICPA, in an appeal to FASB to delay the standard for private companies. As non-public companies face their effective date at the start of 2020, they need more time to work through the issues, he says.
“Some,” remarked Pounder, who says he has worked with numerous different packages with different clients. “That’s an understatement.”
Few software solutions do everything a company needs to comply with the new lease accounting rules, Pounder says. And of those that provide at least part of the answer, some of them produce wrong answers. “It’s not only not complete, it’s not correct,” he says.
A Deloitte Webcast poll in February also hinted at the extent of the problem. Roughly half of the nearly 1,000 participants said they planned to spend as much time or more working on lease accounting compliance even after the effective date. About one-third said they were relying on some combination of manual efforts with software to achieve compliance, and 6 percent said they were reassessing technology because their first try in implementing a lease accounting software solution did not work.
Some software can’t correctly distinguish between the current portion of the lease liability and the long-term portion, says Pounder. Some companies aren’t fully confident in the lease liability figures that their software is producing, leading them to perform a materiality analysis to determine how serious the error really is.
At least one software package didn’t contemplate how large the lease liability would be, so it drops a digit from the lease payment, says Heather Winiarski, a shareholder at Mayer Hoffman McCann. “That was isolated,” she says. But she’s also seen software that can’t correctly account for partial periods within a financial reporting period. “If you have a lease that starts on Jan. 15, for example, it can’t prorate that half month,” she says.
“When you think of enterprise software as a category being developed, most software categories take seven to 10 years to develop … Many companies that got into the market around the lease standard change had no prior experience. They started from scratch.”
Michael Keeler, CEO, LeaseAccelerator
Some software simply isn’t built for the way it’s now being used, says Ane Ohm, co-founder and CEO at software provider LeaseCrunch. “Some software is built for real estate, so it works really well to track real estate, and then they’ve added a lease accounting module,” she says. ASC 842 requires the tracking of not just real estate leases, but also equipment leases and even lease agreements embedded in service contracts.
Software is also falling short in producing the journal entries companies need to take their leases on to balance sheets, says Ohm. Some solutions also fall short in producing the quantitative data required in ASC 842 footnote disclosures. “That’s a huge deal,” she says.
ASC 842 requires far more data points than historic accounting, which required most lease liabilities to be explained to investors only in footnote disclosures. In fact, the standard “has a huge appetite for data,” says Pounder.
The standard also hit the GAAP rule book at the same time as its companion standard in International Financial Reporting Standards, IFRS 16, which classifies leases differently and requires a different approach to bring lease costs through the income statement.
With the transition from historic standards to new standards under both U.S. GAAP and IFRS, which is pertinent to multinational companies that report in multiple jurisdictions, software has a big job to do, says Michael Keeler, CEO at software provider LeaseAccelerator. “The multivariate math under all of that holds 100 billion potential combinations,” he says.
On top of that: “When you think of enterprise software as a category being developed, most software categories take seven to 10 years to develop,” says Keeler. When FASB issued ASC 842 in 2016, it gave companies a little less than three years to comply. The timeline for IFRS 16 was similar.
Some software developers had some experience with accounting software or with leases, while some entered the market to pursue the opportunity ASC 842 presented. “Many companies that got into the market around the lease standard change had no prior experience,” says Keeler. “They started from scratch.”
Add to that: “There were some challenges for not only lessees, but also lessors,” says Winiarski. And there’s country-by-country reporting for global companies, not to mention tracking discount rates required to calculate the lease liability. In some cases, companies are tracking multiple discount rates in individual jurisdictions, she says.
Where software can’t do what companies need, spreadsheets are the answer, says Winiarski. “If the software isn’t reliable for calculations or can’t handle the possibility of impairments or modifications, that has to be maintained within a spreadsheet file that can be handled by the software,” she says.
After doing what was necessary to get leases on to balance sheets, now companies are largely struggling with how to get to a place of ongoing compliance, says Keeler. That means continually tracking changes to leases, such as adding new leases, removing old ones, or reflecting modifications to existing leases. “The whole management and administration component is very intensive and very manual if you don’t have it automated,” he says.
Winiarski is advising companies to continue to work with software vendors to identify and address problems. “I believe there is light at the end of the tunnel,” she says. “The more you report to software companies what you are seeing, the faster it all will get fixed.” In the meantime, manual efforts, surrounded by strong processes and internal controls, is critical, she says.