Ask the expert: Technology in lease accounting

Donald J. Coduto, Advisory, KPMG U.S.

Donald J. Coduto is a KPMG Advisory leader for the firm’s implementation initiatives related to the new lease accounting standards and is assisting several large multinational organizations with their adoption of the new lease accounting standards.
Donald J. Coduto is a KPMG Advisory leader for the firm’s implementation initiatives related to the new lease accounting standards and is assisting several large multinational organizations with their adoption of the new lease accounting standards.

Solutions for lease accounting problems

KPMG helps companies design, implement, and sustain accounting processes, policies, and systems that support compliance with the new lease accounting standards (FASB ASC Topic 842, Leases, and IFRS 16, Leases). The KPMG Leasing Tool (KLT), a proprietary lease accounting system, combines the technical accounting skills of KPMG’s professionals with the firm’s practical experience in designing processes and controls while leveraging technology to help companies create a comprehensive approach to lease accounting compliance.

Today, KLT is available to companies by subscription, either as a cloud-based solution as a service or through KPMG’s Lease Accounting-as-a-Service, an outcome-based service supported by the proprietary KLT technology.

Why are outcome-based services relevant for lease accounting?

Companies are increasingly thinking about using outcome-based services as a means to improve the quality and consistency of business information and performance, while also controlling cost. Outcome-based services can help to achieve these objectives by providing ready access to subject matter experts, well-established operational processes, and leading-edge tools and technologies at a predictable cost. In our experience, the best time to consider  outcome-based services is at the implementation of new technology-supported processes, such as those required for lease accounting compliance.

An organization can always build up its back office with significant investments in people, process, and technology, which produces its own set of challenges and limitations. Or alternatively, consider an outcome-based service arrangement to help a company tackle these transformational challenges. A prime example of this is KPMG’s Lease Accounting Solution, which is built on the proprietary KPMG Leasing Tool, with a turnkey target operating model based on KPMG’s extensive experience in accounting operations, process, and controls, creating lower risk related to evolving technology and better cost control.

What should companies that have already adopted the new lease accounting standard be doing today?

Companies that have adopted should be assessing the compliance activity in place — including people, process design and efficiency, and technology — to identify needed changes resulting from lessons learned from recently completed adoption efforts. Some companies adopting Jan. 1, 2019, used the most expedient method to meet the compliance deadline, including not fully integrating software, knowing that changes would be required for efficiency going forward. As a result, KPMG is engaging with clients to assist companies in fully integrating its new leasing application with other systems, including enterprise resource planning systems. This is also the time to critically evaluate period-end close to maximize timeliness, accuracy, control, and efficiency. Changes required to address identified issues and improve results should be planned and implemented.

Beyond addressing lessons learned from adoption, management should focus their attention on optimizing processes and can begin to pivot their attention to maintaining compliance, producing relevant and reliable management information, controlling cost, and  promoting sustainability. These considerations often include continuing education on key topics (e.g., embedded leases, tax considerations, use of software, etc.) Moving past operational and compliance optimization, companies should also start examining opportunities to leverage investments in lease portfolio data gathered for strategic business decisions (e.g., considering lease-versus-buy decisions).

What should companies that haven’t yet adopted new lease accounting standards be doing today?

Take advantage of the experiences from the first wave of adopters. The fundamentals of the adoption methodology remain the same. Begin the adoption process early by establishing a program management team that includes senior leadership to clearly establish overall project ownership and responsibility. With specific attention that considers the people, process, and technology, an effective project plan should include the following steps:

  • Step 1: Assess — Prepare a thorough assessment including analysis of your entire lease population; the policies, systems, and information needed to comply with current standards; and data management requirements. 
  • Step 2: Design — Complete design road map that outlines all business, process, and technology requirements; identifies data management procedures; addresses policies, disclosures, and training; and includes detailed implementation steps and timing. 
  • Step 3: Implement — Develop technical architecture; configure system software; design process, IT, and security controls; complete testing; conduct training workshops; launch new processes and systems; and generate financial reports and disclosures.
  • Step 4: Sustain — With new lease accounting processes and systems fully integrated into operations across the company, manage your lease portfolio more proactively and respond to future changes in accounting standards.

Often, companies underestimated the amount of time required to complete these activities. A recent survey indicated that the total expected cost for implementing the standards increased by 65% from initial estimates, primarily due to the need for new lease accounting software. If possible, companies should complete their accounting and process assessments before beginning their system implementations; otherwise, they need to accept some inefficiencies with running a parallel track.

What should companies be thinking about related to internal controls and the audit?

With a change in the lease accounting process, management will need to reevaluate the company’s internal controls over financial reporting relevant to the leasing process to ensure appropriate controls are designed and implemented, and tested for both design and operating effectiveness, in connection with management’s assessment of internal control over financial reporting. A change in the lease accounting process is likely to have significant effects on the design of controls, including both manual and IT controls. For example, if the implementation of a new lease accounting system that is used to produce financial reporting information is an in-house application that operates on the company’s own systems, it may require additional testing of general IT controls and specific application-level controls. However, if the new lease accounting system is managed and operated by a third-party service organization, the IT control considerations will differ and could necessitate arranging to receive and review relevant SOC 1 reports and, in some cases, testing of user controls.

With respect to the audit in the year of adoption of the new lease accounting standards, planning and communication are the keys to success. In our experience, regular interaction with your external auditor throughout the year is critical. Companies should take advantage of these regular interactions to review their approach to adopting the new standard with the audit team and solicit feedback; discuss the planned timetable for the adoption activities and agree on key deliverables and due dates; coordinate the nature and timing of audit procedures related to balances, transactions, and controls; and discuss how significant estimates and judgments have been considered. At the very minimum, both the company and the auditor should work to ensure that any issues are identified and resolved well before year end.

For more information about the KPMG Lease Accounting Solution, visit the KPMG Leasing Tool.