Why Lease Accounting Software Systems Fail
by Matt Waters, CPA on May 10, 2022
Adoption of ASC 842 was challenging enough. No company implemented new lease accounting software expecting to replace it just a couple of years later. But many are doing just that. What are the reasons why lease accounting software systems fail?
Many corporate buyers found out the hard way that under-developed systems lack important functionality in nine key areas. This forces accounting teams to spend countless hours creating manual workarounds in spreadsheets, leading to lost productivity, control issues and serious audit challenges.
Industry experts with leading accounting firms estimate the failure rate among new lease accounting compliance projects is more than 25 percent based on feedback from public companies and early adopters. Much of that failure is attributed to the selection of inadequate lease accounting software.
Many newly developed, low-cost solutions appeared to have everything companies needed during the product demonstrations. But only after companies were neck-deep in tedious manual processes to make reporting work did they realize that their new solutions didn’t live up to supplier promises.
Here are the nine most common reasons why lease accounting software systems fail.
1. No Audit Details in Reports
Lease-level details needed by auditors simply aren’t included in standard disclosure, roll-forward and reconciliation reports. This may be the most essential reason why lease accounting software systems fail.
Most lease accounting solutions have a standard one-page disclosure report containing numbers required by ASC 842, but they lack lease-level supporting details that auditors need to ensure the total amounts listed are accurate.
Missing details require accountants to pull amortization schedules from each lease record so auditors can tally the numbers to ensure they equal the total amounts on the disclosure report. If the reported amounts differ from the auditor’s totals, accountants must then spend additional time discovering where the errors are. When these discrepancies can’t be resolved, issues are documented as errors in the audit.
In mature lease accounting software, all amortization schedules are in the application, and supporting details for every lease are automatically published to the disclosure reports.
Roll Forward Reports
Auditors commonly request lease accounting roll forward reports, which present three main things:
- The company’s total balance of the ROU asset account and the total balance of the lease liability account at the beginning and end of a period.
- Numerical details that correspond with the following categories showing why the balances changed during that time: amortization, depreciation, additions, terminations, renewals and impairments.
- The balances and categories in total for the company and for each individual lease.
Without an automated roll forward report, accountants must pull separate reports from the ERP and their lease accounting software, perform VLOOKUPS in spreadsheets, and tie the reports together. Accountants must search through hundreds of lease records to identify balance changes associated with additions, terminations, renewals and impairments. They then must assume that balance changes not identified in their search were due to amortization and depreciation. This entire process can take days to complete and is fraught with risk, because auditors will test the assumptions.
Well-developed lease accounting software automatically runs a roll forward report with all supporting details formatted for audit presentations.
2. No Ad Hoc Reporting Flexibility
Another important reason why lease accounting software systems fail is the lack of ad hoc reporting, so users can’t create reports as needed on all lease data fields. For example, there’s no way to run a streamlined report that contains only amortization schedules for leases in a specific region that have been either impaired or terminated. To get the data that’s needed, accountants must run a standard report, export it to a spreadsheet, and then manually remove all other irrelevant records and fields.
Sophisticated software allows accountants to report solely on chosen fields and to filter by the company’s hierarchy. Users can drag-and-drop any lease data field into a report. Once an ad hoc report is created, it can be saved as a template, shared with others, updated on a set schedule, and emailed automatically.
3. No Accounting Policy Compliance Checks or Validation of Lease Data
Systems that can’t test lease data entries and bulk uploads for errors cause big reporting problems down the road. In addition to capturing and maintaining a high volume of lease data and associated amortization schedules, companies must maintain this information and ensure its accuracy for payment processing to landlords and vendors.
There are two main ways users enter incorrect data that software systems should test.
The first way is by manually entering data into a lease record. For example, ASC 842 says leases with a transfer of ownership clause should be classified as a finance lease, but accountants sometimes inadvertently tag them as operating leases. Other errors are made by incorrectly typing in data such as numbers or text details.
Ideal software automatically recognizes errors based on ASC 842 rules and provides instant error messages to users entering data. It also enables managers to run periodic exception reports, which can identify issues across a portfolio of leases. Such reports provide a list of previous warnings, actions that were subsequently taken, and usernames of those who took the actions, as well.
The second way incorrect data is input into the system is via bulk uploads, which allows the addition of numerous data points in seconds. Software that can’t identify missing or incorrect data creates extra work and errors downstream.
During bulk uploads, powerful software blocks those records whose fields contain incorrect or missing data. Users are immediately notified which records were blocked and which fields must be corrected before attempting to upload them again.
4. No Automatic Remeasurements
Without automatic remeasurement, users must create manual calculations for renewals, terminations, partial terminations and impairments.
Remeasurements occur often, yet many lease accounting software solutions have no ability to remeasure the amortization schedules. When performed within a spreadsheet, each type of remeasurement requires its own calculations, takes at least 30 minutes, and must be saved for auditors.
High-functioning lease accounting software automates remeasurements. Accountants can simply click on the type of remeasurement that is needed, and with just a few more clicks, the software automatically remeasures the ROU asset and lease liability, which is audit tracked as well.
5. No Automatic Retrospective True-Ups
Errors or omissions discovered after month-end close require manual corrections in spreadsheets when software lacks functionality to automatically fix these issues. Instead, accountants must show the amount that should have originally been booked, the amount that was booked, and the difference between the two. This tedious process is time consuming and introduces risk with accounting records maintained outside of the software.
Mature lease accounting software automatically calculates the true-ups based on the dates of adjustments, posts the impact to the general ledger in the current period with no impact to a closed accounting period, and maintains an audit trail of the transactions.
6. No Flexibility to Split Amortization Schedules
Systems lack the ability to break out lease details such as TIA amortization for tax, purchase accounting adjustments and cease use adjustments.
Without the ability to easily split amortization schedules, accountants are forced to create supplemental schedules in more spreadsheets. Each instance requires hours of additional work and introduces additional risk due to schedules housed outside of the software.
7. No Discount Rate Matching
Without automatic matching to company rate tables, accountants must research rates and insert them manually. Large companies have hundreds of rates to choose from as they’re based on geography, currency, lease term and type of lease.
Fully developed software allows organizations to upload their discount rate tables and automatically assign the correct rate to each lease based on the company policy, saving hours with a controlled process.
8. No Automatic Journal Entry Integrations with Approvals
Either systems can’t integrate with ERPs, aren’t supported, or some buyers discover that delivered integrations simply don’t work.
The lack of integrations with an ERP system forces accountants to download data from their leasing software and spend hours in spreadsheets manipulating columns into the prescribed format, removing unnecessary data, adding the right cost centers and GL strings, and then uploading the journal entries into the ERP.
Enterprise class software integrates with all major ERPs and financial systems, including those for accounts payable and accounts receivable, reconciliation and fleet vendors. These integrations create automatic workflows, save countless hours of manual workarounds and unnecessary processes and reduce the risk of errors. Integrations are also easily tracked and auditable.
9. No Ability to Add Company-Specific Fields
The inability to customize data fields for non-generic items creates another reason to separately track information in spreadsheets. Most companies have reasons to track information unique to either the business or industry, but most under-developed systems were created too hastily to accommodate information outside standard lease agreement fields. They only solve for a simple grossing up of the balance sheet.
The ideal system recognizes the need to maintain custom, company-specific data alongside standard lease data for ease of access and a single source of reliable information for relevant reporting.
If your existing lease accounting software is missing these essential, time-saving functions – or if you’re looking to implement the company’s first solution – get the system that can do all this and more CoStar.
CoStar is trusted and recommended by more leading accounting firms and service providers to manage and report on real estate and equipment for compliance with ASC 842 and IFRS 16 guidance. If your lease data is already in a database, upgrading is easier than you’d expect.
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