Is there a better way than spreadsheets for lease accounting?

Is there a better way than spreadsheets for lease accounting?

This financial year marks the fourth year that many Tier 1 and Tier 2 for-profit entities have been applying on-balance sheet accounting as required by IFRS 16 Leases for most of their leases as a lessee, a change that at the time introduced a significant practicable headache for entities with more than a moderate population of leases as lessee.

For Tier 1 and Tier 2 Public Benefit Entities reporting under PBE Standards, on-balance sheet lease accounting is also almost certainly in your future once the External Reporting Board (XRB) finalises its Leases Exposure Draft  (IPSAS ED 75), as the requirements proposed largely follow the same lease accounting for lessees that apply to for-profit entities under IFRS 16.

Back in 2019 when NZ IFRS 16 became effective for for-profit entities, entities typically went with one of three approaches to managing their lease accounting for leases as lessee, namely:

  • Approach 1 Moved to lease accounting software.
  • Approach 2 Moved to an outsourced lease accounting service (that utilised lease accounting software).
  • Approach 3 Managed the lease accounting internally on (EXCEL) spreadsheet workbooks.

BDO currently provides services across all three approaches above , with Approach 1 and Approach 2 being provided via BDO LEAD, being BDO’s own internally developed lease accounting software (click here for more details).

Further details on these approaches, and our observations of entities in practice are provided in the article body below.

If you are considering a move to an outsourced lease accounting service (Approach 2) for your entity’s upcoming 31 March 2023 and 30 June 2023 reporting dates (or those ending or commencing thereafter) please contact BDO’s IFRS Advisory  team to discuss how this service could dramatically improve your entity’s overall lease accounting “experience” through BDO’s Managed Lease Services offering, which  currently being used by over 150 entities across New Zealand and Australia.

Observations from lease accounting approaches in practice

There are pros and cons, benefits and trade-offs in following each of the above approaches namely:

  • Approach 1 incurs a committed actual cash outflow in terms of licence fees, and also requires that staff are adequately trained in and well versed in using the software at all times (not just at reporting date). But the benefit of Approach 1 is that there are internal time and cost savings in terms of automating certain manual processes of the calculation, mitigating human error, and reducing Audit time and costs (large manual spreadsheets require more Audit testing than automated computer software).
  • Approach 2 incurs a committed actual cash outflow in terms of licence fees, that depending on the size and nature of the lease population may be higher that Approach 1. However, in additional to all the same benefits of Approach 1, the entity doesn’t incur any internal time and cost and does not need to ensure staff are trained in (another) piece of company software. This approach has been ideal for those entities that want to just set-and-forget, and don’t need access to lease data or lease accounting numbers for management purposes during the reporting period.
  • Approach 3 has no direct committed actual cash outflow, as the lease accounting is managed on internally compiled spreadsheets. However, as noted above, Audit fees for the audit of these spreadsheets can by higher. This approach is also highly susceptible to error in data input, formula transition and breakage etc., which can add additional and unproductive time and cost to finance teams.

Over these past 3 to 4 years we have seen how entities have gone forward with their chosen approach, and have the following observations:

  • Few if any entities have reverted to spreadsheets having first gone with Approach 1 or Approach 2.
  • A few entities have reverted from Approach 1 to Approach 2, usually where there have been issues in ensuring staff remain trained and competent in using the software, but where the lease population has been of the size and nature that Spreadsheets are not appropriate.
  • A notable increase in entities moving from Approach 3 to Approach 2, for various reasons including (but not limited to):
    • Frustration with having to deal with large, complicated spreadsheets (and lease accounting in general), with the move to a set-and-forget approach being extremely appealing.
    • Overall cost savings once internal time and cost and reduced Audit fees are considered together.
    • At the request (suggestion) of Boards of Directors (and Auditors) to improve overall accuracy and ensure the financial statements are not materially misstated with respect to leases.

Management call to action

  1. Is continuing to manage your entity’s lease accounting on spreadsheets a drain on your finance team’s valuable time?
  2. Are your entity’s auditors reassessing their Audit fees with respect to having to audit cumbersome spreadsheets?
  3. Are you experiencing issues with “continuity of staff” who know how to use and operate the software under Approach 1?
  4. Are the costs of Approach 3 exceeding the benefits of doing it in-house?
    (With 3 to 4 years of practical application under their belts, finance teams now know that the “pinch-points” flagged at the outset about a spreadsheet approach are real, and that applying such a manual approach has real internal time and cost consequences that are difficult to manage and mitigate.)

If the answers to any of (1) to (4) are yes, it may be time to consider moving to  an outsource approach such as BDO’s Managed Lease Services.

If this s something you would like to discuss further, please to contact BDO’s IFRS Advisory team to determine if BDO Managed Lease Services is the solution for you.

For more on the above, please contact your local BDO representative.