WLN Columns

You may be ready, but what about your technology provider?

Like it or not, the leasing industry is in for a big change; a big accounting change, to be specific.  As we are all painfully aware, the Financial Accounting Standards Board (FASB), in conjunction with the International Accounting Standards Board (IASB), is working to make this change a reality.  With a second exposure draft slated for issue in the first half of 2012, and a final draft of the new standard expected before year end, it is a distinct possibility that the deadline for compliance may be as close as January 1, 2015.

As an accountant and an industry service provider, I have a responsibility, not only to my firm, but to all of my clients, to make sure that we are ready to hit the ground running.  I know that the implementation of this new standard will be a daunting task that requires detailed planning and preparation.  In fact, our firm’s planning has already begun.  But as much as I plan, learn, train and implement, all will be for naught if my technology provider doesn’t do the same.  As much as I may know the rules and regulations of the new standard, if my technology doesn’t, I will have a less than desirable outcome.

Why, you may wonder, should I be concerned about being ready, when the final standard isn’t even out yet?   First, a change of this magnitude will encompass several areas of your business, not just your financial statement presentation.  So, it is important to assess all of the affected areas and determine what changes need to be initiated, and when.

If compliance with the standard is required effective January 1, 2015 and requires restatement of active leases, it stands to reason that leases written today may be impacted by the change, for both lessor and lessee.  Shouldn’t we understand how this might impact our business and our lessees’ needs?

Another important consideration is whether the restatement could affect the company’s equity.  If the restatement results in a reduction in equity, how will that impact bank or other loan covenants?  To avoid delay in funding new transactions, concerns in this area need to be addressed with lenders well in advance of the issuance of financial statements applying the new standard.

While there are many important considerations, there is no doubt that the competency of your technology is very high on the list.  Solid technology tools are not developed overnight; they take foresight, planning, testing and implementation.  Additionally, a transition of this type will require reassessment of active leases to effectively restate prior period results under the new standard.  This restatement, and the ongoing portfolio management, may require the use of data that our systems aren’t retaining today.  In fact, we may need data we aren’t even collecting in our lease application today.  If we wait until 2014 or 2015 to start collecting, or tracking, this data, we will not be in a position to reassess our active leases at restatement time without substantial manual manipulation.

How do we make sure our provider is doing their part to prepare for the upcoming accounting changes?  Communication is key.  Your provider should be willing to discuss their plans and progress with you and share their current timeline, which is, of course, dependent upon FASB’s final issue and implementation dates.  Your provider should welcome your inquiries as well as your input on the process.  Ask them to share with you their assessment of the current proposal and how it will impact their current system.  Will they upgrade the current system or are they developing new technology?  Are they calling on industry experts for guidance, or do they have the required expertise to address the issues in-house?  Have they evaluated the criteria that will be needed under the currently proposed rules to determine what additional data tracking may be needed today in order to assure a smooth transition to the new standard?

In assessing the challenges of restatement, it is important to determine, and communicate to your provider, what expectations you will have for your system.  My highest priority is to make sure my current system is tracking the data I need to properly restate leases when the time comes.  I expect my system not only to restate leases as of the required date, but also to determine the portfolio value under the new standard as of periods prior to the restatement date, so that I can properly reflect these values in my comparative financial statements.  I anticipate having the ability to do a test conversion well in advance of the restatement date, to head off any obstacles that may arise during the process.

There are many important issues to consider that, while not critical today, do deserve and require careful consideration and planning well in advance of the new standard’s implementation date.  While it is not probable or reasonable to have all of the answers today, assembling a task force to identify the affected areas and designing an implementation timeline are critical steps.  Reaching out to your provider, to see that they are on track, is a must.  Don’t wait until restatement time to find out whether your product will perform as needed.  As President John F. Kennedy once said, “The time to repair the roof is when the sun is shining”.