While there is no way to make lease accounting implementation a joy, there may be a way to make it less challenging. Consider lease accounting software. Ane Ohm, cofounder and CEO of LeaseCrunch, joined us to discuss lease accounting software’s advantages over traditional spreadsheet solutions, the benefits of time saved and information security, and the differences in the needs of private and public firms.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

It is probably a fairly large understatement to say that implementation of the lease accounting standard is a little bit complicated. CPA firms and practitioners can use all the help they can get in making the process less of a burden. Our guest today has an idea. Ane Ohm, co-founder and CEO of Lease Crunch, joins us to talk about lease accounting software, namely its superiority over traditional spreadsheet solutions, its benefits in the area of time saved, differences in the needs of public and private firms, and more.

In general, what would you say are some of the challenges of implementing the lease accounting standard?

[Ohm] The biggest is that many organizations don't have their leases centralized. Finding them all can be a big challenge, but you do hear that regularly in accounting news. There's actually three other things that sometimes catch organizations by surprise. The first one is that people will start analyzing their individual leases before they look at their policy elections or identifying the reporting that they're going to need on an ongoing basis. What we find is ... this is probably the biggest cause of rework … they start doing the individual leases, but they haven't done all the setup. A second one, a second really big thing that we see that catches organizations by surprise, is that they find that they oftentimes have to review every single contract they have, even those that are not considered leases because they might have a possibility of embedded leases.

These are contracts that have some sort of physical assets that actually qualify as a lease for accounting purposes. Common example is a health system contract for disposables where the piece of equipment used is included. Another that can result in an embedded lease is with warehousing service contracts. So embedded leases is something that oftentimes catches organizations by surprise. Then the last big thing is that work doesn't end when you calculate your beginning balance with the newly standard, it takes ongoing effort and cross-functional involvement to make sure that leases are properly identified and going forward. Those are the three things that really catch people by surprise sometimes.

When looking for assistance in implementing the standard, what would you say are some of the limitations of the spreadsheet solutions that are out there right now?

[Ohm] I have to start out by saying I'm a huge fan of spreadsheets. I'm a CPA, right? We can't help, but we love the spreadsheet. Unfortunately with this new standard, even if you just have a handful of leases, spreadsheets can be untenable. There's the basic limitation that a spreadsheet formula can be easily and very inadvertently changed, which means the accuracy of spreadsheets have to be revalidated frequently even when the data is relatively unchanging.

Another thing is that it's difficult to calculate all the quantitative footnote disclosures with spreadsheets in particular. The one that we hear that gives people a lot of headaches ... there's two of them, the weighted average discount rate and the weighted average remaining terms. Even if you just have a handful of leases, these are difficult calculations to do. There's also the manner in which a lease revision should be treated. Changes need to be made on a go-forward basis as of a decision date. This is really hard to do in a spreadsheet. Then, of course, there's the workflow validations and wizards and things that come in the system, that helped calculations to be more accurate when users have the right guidance at the right time.

One alternative to a spreadsheet solution is lease accounting software. Let's go over a few of the reasons why you believe this is a little bit better of a solution for people. How is lease accounting software superior in the area of accuracy?

[Ohm] It gets to that last point I made about the challenges with spreadsheets and in fact it's a hallmark of how we designed Lease Crunch. An easy-to-use system isn't just pleasant, it's not just that it's nicer, but it actually drives positive measurable outcome. It's faster to implement, there's less need for training because the system is intuitive, and includes in all those application guidance, tips, wizards, and definitions, it allows for quick entry of new leases and all of that together ensures greater accuracy. Simplicity of design means that the person knows what to enter where and those integrated validation checks just really underscore that.

You mentioned the word quick in there some place, so how does lease accounting software improve upon spreadsheets solutions in the area of time savings?

[Ohm] If you're adding just one lease at a time, one thing that was really helpful is having screen layout and clear guidance so that a new lease can be added into a system in minutes. Another part of the time savings is that all of the reporting that you need to journal entries, footnote disclosures, are immediately available. You don't have to adjust spreadsheet calculation to get to an updated report. The other part is those built-in validations that ensure accuracy. It saves you a lot of rework time. You're getting it right the first time around. That's a huge deal. The other time saver is you have a flexibility to report on any combination of leases. You oftentimes don't have so much flexibility with a spreadsheet. You set it up one way, that's how you have to do things. But if anything changes, you're really kind of stuck with completely redoing the spreadsheet. So, time savings is perhaps not in that entry. It is in doing all of the other things that the standard requires for reporting.

Information security clearly is a big deal when you're working with people's records or things along those lines. Can lease accounting software provide benefits in that area? The area of information security?

[Ohm] There's the obvious benefit that each user has to log into a password-protected account, but there's also ... again, it goes well beyond that data. It should be encrypted both as it's passed into the database, as well as while it's being stored. So that encryption provides a lot of security for an organization. And system providers also have secured backup systems, so you really reduce to eliminate the possibility of any potential data loss. Then really importantly, all of that security is being regularly tested to make sure it continues to be a safe environment with latest protections.

What are the benefits of lease accounting software for processes and guidance? Does it make it easier to walk through?

[Ohm] You know, it's funny, I recently had a CPA firm partner tell me that he learned the new lease standard entirely through our integrated tool tips. I'm pretty sure he was mostly joking, but you know it makes a difference to have a system that's clear about what is required, what data entry is required and how information is defined. What do I mean by that? Under the new lease standard – initial direct costs, for example – the definition of what's included is slightly changed.

Do you include legal fees or not? You could look it up in the standard itself, of course, but you could also click on this little question mark next to field and that section of the standard is revealed instantly. That's really having the right information at the right time. It means that people are more likely to look it up and make sure that they're getting it right the first time around. I cannot say enough about the importance of having guidance integrated right into the tool.

Now when it comes to lease accounting implementation, is there a difference between the needs of public and private firms and which sort of solution they should consider?

[Ohm] It's interesting. When you talk about public versus private, there's more requirements of the public companies. There's required reporting, there's required process control, there's requirements around SOC reports. But I would say that private companies benefit from those same features. So, I don't know that it really, the public versus private, drives much of a difference between the solutions. Where we see the biggest difference is with organizations that have thousands of leases versus dozens of leases. So, a very large public company could have very few leases. It just depends on the nature of the organization. But what we see is with thousands of leases, organizations have more need for control over user access, for example. They have more reporting needs and more flexibility that's required for reporting needs.

Those organizations that just have dozens of leases, they really emphasize, they really value simplicity. How do I most easily arrive at an accurate calculation? For us, as a system provider, we have to deliver enterprise-level, free features without overcomplicating the system for everyone. It's not easy to do, but we welcome the challenge.

What sort of factors should organizations consider when they're figuring out when they should begin the implementation process?

[Ohm] I'm a broken record and everybody is saying this, but you really need to assess this sooner rather than later. The first thing to consider is the fact that it's not just about the number of leases you have, it's the complexity of leases. So, if you have 50 real estate leases and 50 equipment leases, those real estate leases, each one might come with a bunch of amendments, it could take hours and it might be best completed ... that analysis might be best completed by a real estate expert, whereas those 50 equipment leases, they oftentimes are pretty straightforward and can be analyzed and potentially input into a system in minutes. Make sure you don't underestimate based on quantity. Look at the quality as well. Another thing is when you look back to the challenges that I brought up at the start, don't forget to begin with policy election decisions and making sure you really understand the type of reporting that you're going to need before you jump into lease analysis.

I think this is probably the most tedious part of implementing the new lease standard, but it will save a lot of time in the end. Finally, I think one of the really big things that organizations that have not yet adopted need to consider are practical expedients. These practical expedients offered by the new lease standard oftentimes will result in a larger lease liability and right-of-use asset, but they make adoption much easier. There's so much complexity on this. We really strongly recommend that organizations consider using them and recognize that some of them can be adopted, for example, by asset class.

Let's say you really need to manage your lease liability on real estate leases. You will spend the time separating out common area maintenance from your lease payments. But perhaps it's unnecessary to do so for vehicle or equipment service contract. Really, really look at those practical expedients and take advantage of as many as possible.