Companies ready for leases standard, but only with help, finds EY 2018 Lease Accounting Change Survey
New York, 3 December 2018
- Of those who’ve selected a long-term system, 86% are also planning to implement interim solutions to meet deadline.
- Use of external resourcing has surged; budgets have ballooned to meet deadline.
- More than half of companies (51%) using a long-term automated solution plan to use AI.
Most companies expect to be ready to operationalize the required changes needed to comply with the new lease accounting standard. But that’s only with the help of interim solutions, temporary workers and external consultants, and much larger budgets.
According to the new EY 2018 Lease Accounting Change Survey of finance and IT professionals, 85% of respondents say they are on track to meet the required deadline of the new leases standard. The remainder report experiencing challenges and may not have a fully functioning system in place by the deadline. But while nearly three in four companies have selected a long-term system, of those, 86% are also planning to use interim solutions.
To meet the deadline of the new standard, which brings onto the balance sheet operating leases for assets such as real estate and transportation, IT and manufacturing equipment, use of external resourcing has surged and budgets have ballooned. Forty-five percent of companies say they are using temporary contingent workers to support the accounting change, compared with 17% in 2017, and 56% are bringing in consultants, a 16% increase over 2017. Almost half (47%) say they are anticipating a cost between $1 million and $5 million to implement the changes just for leases. Last year, just 28% said the same.
Anastasia Economos, EY Americas Leases Leader, says,
“Compliance with the new leases standard has become a larger, more complicated endeavor than many companies originally anticipated. From choosing a system and gathering all relevant data from across the organization to deciphering contracts and identifying embedded leases, piecing together the data and IT puzzle, especially for complex global organizations, is core to the challenges many companies face, but also necessary for a successful implementation.”
Complexity of data and legacy IT the biggest challenges
Data collection is proving very difficult in complex organizations, many of whom have operations both domestically and abroad. Eighty-three percent say that inventorying and collecting data for leases internationally is challenging and 78% say the same about US data. For both global and domestic companies, systems complexity, gathering and reconciling fragmented data, data quality, and a burden of legacy systems, are some of the barriers to success. Furthermore, 75% note that establishing master data requirements, the specifications needed for data strategy, is an issue. All these factors are driving the need for more help. More than three-quarters of respondents (78%) said that finding the resources and skills within the current IT team has been difficult.
Was the revenue recognition experience a crystal ball for leases?
After three-quarters of reporting under the new revenue recognition standard, companies are still reeling from changes. More than half (51%) describe their experience implementing changes for revenue recognition as very challenging, and 72% anticipate significant systems and process changes post-implementation.
John McGaw, EY Americas Accounting Change Leader, says,
“A number of companies have been able to apply lessons learned from implementing revenue recognition changes to the new leases standard. And with leases proving to be an even more complicated process, the effective date isn’t the end of the road. Knowing that most companies are still dealing with the necessary revenue recognition changes two quarters past the 2018 deadline, it’s easy to anticipate that the same will be true for leases.”
Automation, collaboration and transformation key considerations for success
Automation is a long-term goal, with artificial intelligence (AI) playing an important role. More than 80% of companies are working toward designing a long-term automated solution, with only 5% saying they will use a manual, spreadsheet-based approach long term. Interestingly, more than half (51%) who are implementing automation say the solution includes using AI to identify and abstract lease data.
Lack of collaboration among finance, IT, tax, compliance, real estate, procurement and other functions has been a continuous issue. More than 80% of firms surveyed say it’s difficult to collaborate effectively across multiple functions, up from 75% in 2017. A similar percentage point to collaboration as a key challenge as it relates to the ability to deliver the technology changes required.
Importantly, more companies see compliance as an opportunity for broader business value. Seventy-two percent say it’s an opportunity to drive transformation, up from 63% in 2017, while 71% say it’s an opportunity to upgrade legacy IT systems, compared to 53% in 2017.
Economos says, “Though adopting the new leases standard has presented its challenges, it’s important to take advantage of the bigger opportunity change like this can bring. At EY, we view leases through the lens of ACT – or automation, collaboration and transformation, which can take you from required change to business value. And we are working with companies to help drive insight into better business performance.”
EY surveyed 304 finance and IT leaders from US-headquartered public companies across multiple industries, with annual revenues ranging from US$1 billion to more than US$10 billion, in July 2018 to highlight the key challenges and opportunities associated with lease accounting standards changes.
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