Do you report under GAAP or IFRS? If so, it’s likely that your organization is large enough to include both equipment and real estate leases in its lease portfolio. After speaking with hundreds of companies, LeaseQuery discovered that these have historically been tracked in different departments. Operating leases for both equipment and real estate are currently reported as off-balance sheet transactions. The exception to this are capital leases.
Typically, the real estate department handles the signing and tracking of real estate leases. The information is then sent to the accounting department each reporting period. Equipment leases are signed and tracked by multiple departments, ranging from fleet and facilities management to IT, who also send information to the accounting department at each reporting period. Since this process is not under a single department, it is not uncommon for several leases to get lost in the translation to the accounting department. The real estate leases are typically more material because of the higher lease obligation so, the equipment leases end up being missed most often (Use this free lease accounting transition guide to identify more departments where you can find unidentified leases).
Most leasing software on the market started as lease management or lease administration software and was built for real estate professionals. Because all operating leases were previously off-balance sheet transactions, the accounting functionality was not a high priority. The people who developed these software packages have real estate backgrounds because that was the most important knowledge to have in building the solutions at the time. That all changed in January and February of 2016 when both the FASB and IASB released significant changes to the lease accounting standards. Since these changes, the accounting functionalities of these solutions are crucial to compliance with the new standards.
We have put together this short list of questions to ask any potential lease accounting software vendors so you can make an informed decision and understand if they are the best choice to handle both your real estate and equipment leases.
1. How long have you been supporting all types of leased assets including real estate, vehicles, and equipment?
It is important that you are not going to be what is known as a “paid beta tester” for the software that you purchase. If your potential lease accounting software vendor has not been supporting all leased asset types for over a year, then you are probably going to be paying them while they optimize the usability and accuracy of those new features. What might look easy or complete in a demo will be different than day to day use in real world scenarios.
2. How long has your system been fully compliant for both the current and new lease accounting standard?
Since most of the existing leasing systems started off as lease management or administration systems focused primarily on supporting real estate departments, their accounting functionality is still being completed or just finished. The new lease standard is extremely complicated and requires a great deal of auditing and testing before any financial professional or organization should rely on it for financial reports. This is further complicated when a software company has to re-architect the entry process to accommodate multiple start dates necessary to support the different departments. As an example, the real estate department needs to know the commencement date while the accounting department is concerned with the possession date since that is when you start amortizing a lease.
3. If the accounting functionality is new, when were the calculations and outputs audited?
This is an important follow up to question number two. Many lease management and administration software vendors started rebranding themselves as lease accounting software without going through the proper steps. The new lease accounting changes present a great marketing opportunity for software vendors but a huge risk for end users that aren’t informed. As former auditors and accountants from publicly traded companies, we at LeaseQuery know that nothing is considered correct and complete until it is audited. Make sure that every lease accounting software vendor you evaluate can provide third-party audit validation that your lease information when entered in the software will produce accurate outputs.
4. Does the software prompt users to answer equipment or vehicle specific questions?
If the lease accounting software vendor you are evaluating converted the solution from a real estate management solution to handle accounting and new asset types like equipment and vehicles, then the solution is doing something it wasn’t originally intended to do. It is important that the people who enter information into the software don’t have to be lease accounting experts. The software should be easy to use and predict the right question to ask based on previous answers. As an example, you don’t want to have to go in to different modules to address different asset types. The picture below shows how the software should adapt to asking the right questions automatically without switching you to a different module or screen.
5. How many accountants do you have on staff that can work with us during the transition and software implementation?
Transitioning to the new lease accounting standard takes more than just buying a lease accounting software solution. As you go through the process you will need qualified accounting resources with experience helping companies prepare for and transition to the new lease accounting standard. Your internal company resources might be very good at their job, but this is a brand-new standard with many nuances that bring specific, real world challenges that are hard to predict. If your lease accounting software vendor has experienced accountants on staff helping with the project, they can offer advice both on transitioning questions in addition to configuration of the software to meet your specific needs. You don’t want a software vendor that has only one or two accountants on staff at a lease accounting software company. You will be sharing their time with hundreds of other clients. To further test this, ask tough accounting questions during demonstrations to test their knowledge and ask why their software does certain things. It’s a bad sign if the vendor does not have an accountant present when you are viewing a demo of the software.
These five questions are in no way comprehensive of every question you should ask your potential lease accounting software vendor. If you have equipment leases then this will give you a starting point in putting together your own internal score card. If you are interested in some more great questions, download our lease accounting software comparison guide. It provides a full list of the crucial accounting functionalities you should look for as well as the top 15 questions that are worth considering as you go through this evaluation process.