Published on December 15 2010

CHP Consulting has given a lot of thought to the systems implications of the new lease accounting regime. The most important abilities of an enhanced leasing system, in CHP’s eyes, will be to account under the two new accounting methods; to account on a ‘likely outcome’ basis; to restate leases as and when expectations about those likely outcomes change; and to manage the transition between the old and new accounting standards.

CHP will be proposing approaches for meeting these requirements in our forthcoming White Paper, but our expectation is that making software changes to ALFA v5, our flagship leasing software platform, will be the less challenging part; we see the majority of our effort put into helping our clients achieve a smooth transition through the deployment, testing and rollout of the accounting changes.

Here Steve Taplin tackles some of the unanswered questions raised by the new lease accounting proposals:


Q. The leasing exposure draft: are software vendors ready?

Much has been said about the IASB’s lease accounting exposure draft, and its potential impact on the leasing industry. Most lessors are aware that the new accounting standard is looming, and will present some difficult challenges. While the details of the exposure draft may yet change, business sense dictates that lessors must work with their system providers to plan for all possible outcomes.

At CHP Consulting, as one of the major leasing software providers, we are currently finalising our approach to the requirements arising from the exposure draft, and our White Paper on the subject, discussing how modern leasing systems like ALFA Systems v5 can help lessors through the proposed changes, will be published early next year. In the interim, I’d like to communicate some of our thoughts on the subject.

Q. Is the exposure draft finalised?

While the capitalisation of operating leases by lessees has long been expected, the new methods for accounting for leases, both for lessees and lessors, have come in for plenty of criticism, almost universally, in fact. Leading individuals in the industry have described the plans as unduly complex, contradictory, incoherent, arcane and costly - even inept.

Depending who you talk to, the exposure draft is either set in stone, or still very much up for debate. Based on their experience of similar processes in the past, some key figures believe it to be very unlikely that it will change significantly. Meanwhile, other parties - particularly those keen on lobbying the IASB with changes - are adamant that the details are not established fully, and that the IASB could well still review some pertinent aspects as a result of feedback received. With the end of the comment period fast approaching on December 15, time is running out for lessors and lessees to make their views known to the IASB.

Q. What do lessors need to do?

Assuming that the exposure draft is not revised substantially between now and its final publication, the challenge for lessors will be twofold.

Firstly, they’ll need to work with their sales staff and customers to ensure that lessees are still persuaded of the benefits of leasing, despite the additional administration required by lessees to account for leases, and the need to hold them on balance sheet.

Secondly, lessors will need to upgrade their internal systems and processes to cater for the new accounting standard, including accounting on the basis of the likely outcome of the lease, as opposed to the lessee’s minimum contractual obligations.

Q. How can systems providers help?

While the application of the proposed new standard is still some way off, lessors need to plan for how they will tackle these challenges. Naturally, it makes sense for lessors to talk to their system providers to understand what approach they will be taking to upgrade or enhance their offerings to allow their clients to cope with the new accounting methods, and how they intend to assist and support their clients through the conversion itself.

At CHP Consulting, we are keen to ensure that we’re ahead of the curve in terms of understanding the details and implications of the exposure draft. We’ve attended conferences on three continents to understand the impact on our clients, as well as commissioning an internal study to determine how best to meet the resulting requirements. We’re comfortable that our clients will be given comprehensive support in this period of considerable change.

Q. What are the key system issues?

The most important abilities of an enhanced leasing system, in CHP’s eyes, are to account under the two new accounting methods; to account on a ‘likely outcome’ basis; to restate leases as and when expectations about those likely outcomes change; and to manage the transition between the old and new accounting standards.

We’ll be proposing approaches for meeting these requirements in our forthcoming White Paper, but our expectation is that making software changes to ALFA v5, our flagship leasing software platform, will be the less challenging part; we see the majority of our effort put into helping our clients achieve a smooth transition through the deployment, testing and rollout of the accounting changes.


Summary

As a result of the exposure draft, lessors must deal with substantial issues in an already difficult economic environment. However, system providers will be working to provide their clients with solutions to the requirements that arise from the new standard. Certainly, as far as CHP’s clients are concerned, there is no doubt that the challenges posed by the exposure draft will be met with the functionality and support needed to ensure a stable and well managed transition to the new standard.




CHP Consulting’s White Paper on the IASB’s lease accounting exposure draft will be available in 2011 from http://www.chpconsulting.com.

The above was published online by LeasingWorld on 15th December 2010. Reproduced by permission of the publisher.