Companies identify need for new lease accounting software
John Clark 27000476SU firstname.lastname@example.org | | Tags:  eam lease_accounting iwms survey asset_management cio software
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A new survey of 600 senior business and finance leaders from 20 countries who attended Ernst & Young’s Financial Reporting Outlook (FRO) 2011 concluded that in today’s uncertain business climate clear, relevant and comparable financial information is more important than ever.
The conference highlighted that fact that companies anticipate significant issues in the adoption of new joint accounting standards from the International Accounting Standards Board (IASB) and U.S. Financial Accounting Standards Boards that will come into effect from 2013. In its report, Ernst & Young concluded that “Companies need to prepare early and thoroughly in order to minimise the stress and potential cost of application [of the new accounting standards].”
Completion of one of these standards focused on lease accounting is planned for 2012. The IASB and FASB are finalizing details of a joint lease accounting standard that will place all operating leases including real estate, equipment and other infrastructure on the balance sheets of public companies. While no global estimate of the impact exists, the U.S. Securities and Exchange Commission (SEC) estimated that S&P 500 companies can expect to see a combined $635 billion in new assets. A soon to be released survey funded by IBM will further show that almost half of companies expect their assets to increase by 10 percent or more.
So, what does this mean for real estate and asset managers, as well as the IT professionals that support them?
It means a lot. First, companies will require new or upgraded IT systems to comply with the new reporting requirements of the new lease accounting standard. In its survey, E&Y found that this was the greatest concern about the impact on the implementation of the lease accounting proposals under consideration (see figure 1). The new standard creates a significant increase in the complexity of lease accounting as it combines periodic reviews of lease-specific details such as payments, expirations and options alongside financial details such as company borrowing rate to determine the most economically beneficial lease term for reporting. When this information is further combined with stringent audit requirements, related to clear, relevant and comparable financial information, the amount and complexity of information management increases to a point that requires enterprise –class software.
Figure 1: Concerns about new lease accounting standard*
Secondly, most large companies have thousands of real estate and equipment leases. Companies will be required to inventory these leases, abstract pertinent details, and calculate the impact on financial statements such as balance sheet and income statement; on an ongoing basis. In its survey, E&Y found that this was the second greatest concern about the impact on the implementation of the lease accounting proposals under consideration (see figure 1).
Finally, companies that fail to prioritize their preparedness with this new standard jeopardize the financial performance of their company. In its survey, E&Y found that the third greatest concern about the impact on the implementation of the lease accounting proposals under consideration centered on the “Impact on financial ratios and KPIs, including profit measures” (see figure 1). With the significant increase in assets and only organic increases in revenue, key financial measure such as Return on Assets (ROA) decrease, while other like Debt/Equity Ratio increase. These changes may trigger debt covenants or signal reduced financial performance against industry peers.
To learn more about the new lease accounting standard and IBM’s lease accounting solution visit ibm.com/software/tivoli/lease-accounting
*Source: "Financial Reporting Outlook 2011: Navigating through uncertain times”, Ernst & Young, 2011