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Lease Accounting Readiness

Proposed directive calls for data collection and analysis of leasing arrangements

Abstract

In anticipation of a finalized exposure draft (ED) that proposes changing how domestic and global leases are accounted for on the balance sheet, a leading worldwide retailer needed to locate and gather data on its large number of leases. Deloitte conducted a phase one assessment and survey to identify the company’s leases and collect related data into a centralized location. During the assessment, Deloitte demonstrated how the “Lease Accelerator” tool can be used to analyze balance sheet changes and act as a temporary repository while transitioning to a long-term lease accounting management solution.

The Challenge

Accounting for leases under new standards
In August 2010, the U.S. Financial Accounting Standards Board (FASB) and International Accounting Standards Boards (IASB) (collectively, the “Boards”) jointly issued an ED proposing changes to current lease accounting methods. The ED proposed a “right-of-use” model in accounting for real estate, equipment and other lease arrangements. The primary objective of the change is to provide greater transparency by placing these transactions on the balance sheet.

As a result, a U.S. retailer needed to understand potential impact of the proposed standard on its financial statements. Also, the company wanted to be proactive in dealing with its bankers, who would need to know to what extent the company’s debt and interest coverage ratios would change. The lease team was tasked with gathering and compiling lease data in a consistent format and into a single model that could analyze how the retailer’s leases measured up to the proposed standards and what changes, if any, needed to be made. This company faced several challenges ahead of them, including:

  • Modifying its new leasing solution, which was under implementation and not designed to accommodate the new requirements nor calculate the potential financial impact of the proposed standard
  • Improving the quality of its leasing data currently stored in electronic form
  • Managing to account for leases under both the current and proposed future standard during the dual-reporting period required by the adoption of the proposed standard

How We Helped

Putting analytics in action for lease reporting readiness
Because the company had numerous lease agreements across many decentralized locations, Deloitte used an online “Lease Applicability Questionnaire” to facilitate the capture of base-level lease information and introduce tools to provide information in gathering manual or electronically stored data. From the survey, approximately 20 sample leases were selected to demonstrate the benefits of Deloitte’s multi-user, Web-based lease accounting tool known as the “Lease Accelerator,” which include:
Establishing a temporary repository for lease data

  • Enabling lease data aggregation and assessing data integrity within a data repository
  • Projecting the estimated potential financial impacts of the proposed lease accounting changes
  • Providing an applicable support trail to facilitate management’s understanding of lease calculations
  • Providing a bridge toward, and support for, a long-term systems solution

Solution

Armed and ready with lease data for next steps
As a result of this initial survey, the retailer has been able to get ahead of the game by identifying and aggregating data for its lease agreements. When the Boards release the next version of the ED (expected to be in late 2012), this organization likely will be ready for the next step of implementing Deloitte’s Lease Accelerator. By being proactive, the retailer has been able to analyze its lease information more thoroughly, and through data analytics, to identify instances where manual calculations were incorrect or even where the retailer was overpaying rent based on the lease terms and conditions.

 

 

 

 

 

 

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