Leasing Professionals

Vince Baczor warns: “very few companies have begun to prepare properly for the pending IFRS16 lease accounting changes”

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With 25 years in asset lease portfolio management, and having designed and developed three specialist software systems, Vince Baczor is widely considered a global thought leader on the subject. He is now four years into running LeaseSolution, his second start-up, marketing the LS2 lease management and accounting system.

A significant recent win for LeaseSolution was with Samsung Electronics the global leader in mobile, semiconductor and display technologies.

Baczor explained that LeaseSolution and “two global software giants” were initially invited to tender for Samsung’s business.

He said: “The requirement was to provide Samsung with an automated lease management system to enable the running of lease agreements from initial contract acceptance through to termination.

“This was to include the management of all in-life events including but not limited to billing, collection, arrears management, accounting and UK GAAP accounting.”

After protracted evaluation and discussion, Samsung decided to move forward with LeaseSolution’s LS2 Software.

Baczor said: “The unique flexibility of LS2 was recognised right from the outset, and considered critical to help meet the inevitable future uncertainty associated with Samsung’s continued success.”

Subsequent demands way exceeded expectation, but have been continually addressed by simple solutions delivered from the LeaseSolution team.

Enormous challenge

As we start 2017, the implementation date for IFRS16 new lease accounting is rapidly approaching. Baczor has deep concerns about the enormous challenge now facing major corporates.

He explained that, over recent months, a small number of organisations have started to wake up and recognise the amount of preparatory work necessary to ‘get their leasing house in order’ before the January 2019 deadline.

“Just identifying and gathering information on all of their leases will take a great deal of time,” he told Asset Finance International. “In many cases, banks and lessors will need to be approached to provide and/or clarify details and yet many have inadequate internal systems, or sufficient staffing to handle what is likely to be a late surge in demand from their lessees.”

“It is impossible for lessees to really understand the degree of difficulty, or likely hurdles that they will need to overcome. Inevitably, they will underestimate the amount of work involved and associated timescales. There is also the matter of how they are going to contain, manage and report on their data.”

From a software perspective, Baczor explained that there seems to be a lessee focus on lease accounting, even though lease management is a key consideration, particularly for ongoing accuracy and control.  Choosing the right system for both aspects is therefore a critical requirement, although many market options are of limited functionality, and in some cases quite misleading, as many are nowhere near developed, even by some of the largest providers.

Baczor believes that there is a very high risk that the wrong systems will be chosen for the wrong reasons, potentially ‘band-aiding’ part of the challenge, using systems with limited capabilities and longer term inflexibility.

“When considering the preparatory work for IFRS16, each lease has to be identified and then assessed individually, with judgment passed on a number of key areas. This is a very time-consuming exercise and requires personnel with a good understanding of leasing. At the moment, there seems to be a focus the accounting reports systems might generate, when this key ‘judgment’ aspect is being underestimated.”

The scale of the challenge is such that LeaseSolution’s LS2 software, now includes a specific Accounting Profile with 30 Fields of measurement, which are then filtered through 15 layers to provide lease classification alone.  “Otherwise, imagine the degree of difficulty with large and complex lease portfolios.”

With two years remaining, Baczor stressed that work needs to commence “almost immediately for organisations to be anywhere near ready in time”.