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Live from the SAPinsider Studio: Navigating Proposed Changes to Lease Accounting Standards in IFRS and US GAAP

A panel discussion recorded live at Financials 2014

May 23, 2014

In this panel discussion recorded live on the sidelines of the Financials 2014 event, experts from SAP, Nakisa, and EY discuss upcoming changes to the lease accounting standards in IFRS and US GAAP. Panelists Pete Graham of SAP, Romeo De Leon of Nakisa, and Myles Corson of EY discuss proposed lease accounting standard changes and how they will impact SAP customers. Topics discussed include:
  • Overview of the upcoming lease accounting standard changes in IFRS and US GAAP 
  • Timing and status of the proposed changes 
  • How SAP customers can prepare for the changes on the horizon 
  • What solutions can help companies manage this change

Full transcript:

Lucy: Hi, this is Lucy Swedberg with SAPinsider. We’re here live in Orlando at our Financials 2014 event. I’m excited to be joined by a panel of experts here to talk about some changes to the lease accounting standards in IFRS. To start, I have Pete Graham, who’s the director of finance solutions at SAP, then I have Romeo De Leon, a VP of product strategy at Nakisa, and Myles Corson, a partner at EY. Thank you all for joining me today!

Panel: Sure, thank you.

Lucy: So just to start off, for those who might know about what’s happening here, can you talk a little bit about how lease accounting is happening and being accounted for today, and then maybe what changes are on the horizon when it comes to IFRS?

Myles: Sure, and I think it’s both IFRS and US GAAP that are going to be impacted by the changes, proposed changes, to lease accounting, and it’s something the DI, the feds, have been working on for a number of years. And really the intention is to bring leases on balance sheet, most leases on balance sheet, to reflect the underlying substance, of what leases represent, so it’s going to represent a pretty significant change for a lot of organizations, in terms of the process to gather that information and to be able to evaluate the financial impact, both on the balance sheet and on the income statement.   

Lucy: Got it. Can you talk a little bit about the timing here, and what’s the timeline for these changes?

Myles: Sure, as I said, it’s, this has been in process for a number of years, and the boards have been through a very extensive outreach process, there’s been a lot of dialogue, debate, discussion, we’ve had two exposure drafts and a lot of comments coming back on those. Where we are at the moment is, right now, the boards are continuing to evaluate and there’s no formal decision that’s been taken yet. We understand there may be a standard this year, 2014, but clearly that’s dependent upon a number of decisions being reached, an agreement being achieved. If they were to get something out this year, or maybe early next year, I think you’re probably looking at a 2018 implementation date for financial years ending 2018, but clearly the impact on the opening balance sheet would be two years prior to that. So organizations that go with what’s called the full retrospective transition approach will probably be looking at a 1 January 2016 implementation date.

Lucy: I understand. So, given that timeframe, maybe can you talk a little bit about what customers should be thinking about, sort of how can they start preparing for these changes on the horizon, maybe Pete, you want to start?

Pete: Sure. I mean one thing that we’ve noticed is that by talking with all these customers, and the fact that the regulations are being discussed, has actually put kind of a microscope on the area, and a lot of companies are now looking at this area of lease administration, and they’re realizing that they don’t have the automation in place, there’s a lot of disparate information scattered across the enterprise and they really need to get their arms around, and I think Myles, you’ll probably agree that, you know, they need to start this now and I think you have some customers where this process can take well over a year, right, and so that’s one of the recommendations, is start tackling it now.      

Myles: And I think that’s a great point, Peter, I think what we’ve seen is what started as an accounting exercise has actually sort of morphed into a business improvement opportunity, and I think, you know, particularly in the absence of a final standard, as clients have been evaluating, should we be moving forward, a lot of organizations have actually realized, perhaps there is an opportunity to improve the control and the transparency over the process.

Lucy: Sure.

Myles: And also actually to generate some potential cost savings, because there are clearly opportunities around how you manage the financing of leases and also in terms of you know, the way you manage the lease portfolio to Pete’s point, around the life cycle. You know, there may be some inefficiencies because you just don’t have visibility to information at the moment, so there are real process improvement opportunities.

Lucy: Interesting.

Romeo: Yeah, and I think there’s a pattern we’re seeing with discussions with our customers where they’re finding out they’re paying for lease assets where those lease assets are probably assets they don’t use anymore or are no longer in their organizations, so we see potential savings as they become more visible and exposed to the organization.

Lucy: So it seems like potentially the regulation is putting a spotlight on something that maybe should have been addressed anyways, if that’s sort of what I’m hearing from you.

Panel: Yeah, yup.

Lucy: Right. So let me ask you from a solution standpoint, how might an SAP customer try to wrap their arms around this, are there solutions out there that might be able to help them through this process?

Romeo: Well absolutely, I think that we’ve been working with SAP for the last couple of years on developing a solution called SAP Lease Administration by Nakisa, so this is a solution that addresses what we were just talking about, being able to have visibility in terms of all your lease assets, your lease contracts, so what we’ve tried to do is develop a solution that makes it easy for customers to collect this information, to abstract this contract information, to terms that are, in terms of the fields that are required for the regulation and be able to understand what the conditions would be in reference to those regulations and what the potential value of those assets are, and what they would mean in terms of accounting and balance sheets.

Myles: And I think Romeo really hits it on the head though, and the first step is really to have that information in one place so you can conduct the analysis, and I think what a lot of organizations wrestle with is, what is the impact of this, financially and from a process perspective?

Lucy: Right.

Myles: And so having that data set, from which to run some analysis, to understand and be able to plan appropriately is important.

Lucy: Ok. Pete, maybe can you talk a little bit about the relationship then between SAP and Nakisa around this solution, it’s SAP and Nakisa on the brand so if you could speak to that a bit?

Pete: Sure, I mean Nakisa’s a great partner of ours, SAP’s, and they’ve been upgrade partner for a number of years, they’ve been on our pricelist reseller agreements for almost ten—

Romeo: Yeah, since 2007.

Pete: The partnership goes back even further, back almost 15 years. But it was actually at this show about two years ago that I had the initial discussion with Romeo and Babak at Nakisa about you know, this is a very interesting topic, we’ve got a lot of customers asking us about it, and Nakisa really has some good capabilities, certainly around the HR side, around the org model of their product, how they manage data, how they get approvals, the collaboration, good visualization, right?

Romeo: Technology and techniques.

Pete: Really something that we could really marry into the lease space and really come up with a solution that could really help our customers and so….

Romeo: Well that’s it, we’ve been using, we use technologies that’s already been available to many SAP customers so it’s robust technologies, it’s proven, it’s modern, and we built our organization to really become experts in SAP technology, so we’re leveraging all that information that’s in SAP, we’re leveraging technology that’s already used in customer environments, so they’re used to it, that really reduces the implementation time, reduce the TCO. We actually see ourselves as an extension of SAP, so our products team, our development team, we’re all SAP experts in various areas and we talk to SAP many times a day, in different groups, so we see ourselves as you know, little brother of SAP.

Pete: So we’re working very well together on the solution, we actually, you know, now two years, this is the first fruits of the labor, so to speak, you know the product’s literally out the door you know, in the next week or so, which is great.

Lucy: Exciting!

Pete: Yeah, very exciting and the product will really have the best of both worlds, right, the great UI and visualization from Nakisa, the very strong accounting pieces from SAP.

Lucy: Great. So you’re just starting to speak about it here at the show, I’m interested maybe in any initial feedback or customer questions, thoughts, advice, that you’d like to offer up, sort of to wrap it up today? Maybe I’ll start here at the end.

Myles: Sure. I think, you know, the key message is start planning early, because you know, as Pete mentioned earlier on, that process of gathering the information takes time and the clients who we’ve been working with, and particularly where they’re global, where you’ve got the complexity of different languages, different legal environments, and you’re trying to gather information, it takes time, so that’s an important building block before you can then kind of start to do the analysis using the tools, so the earlier you start planning and preparing, the better you’re going to be.

Lucy: Right. Great.

Romeo: Yeah, I agree with Myles’s great point, and in addition to that, this is an area we’re moving very quickly in with SAP, we’re working in all aspects of leasing, whether you’re a lessor or a lessee, whether you’re managing property or non-property, we’re planning to probably provide full coverage and full capabilities to make sure that you’re able to capture all the information and from there manage those lease assets and be ready for any accounting standards that are coming out.

Lucy: Great.

Pete: And yeah, I have to echo what they said, you have to start early and really the solution, SAP Lease Administration by Nakisa is complementary, we have SAP Real Estate management for property, we have SAP Leasing Product for banking, and we’re also asking customers if they want to co-innovate with us on requirements for more solutions or more capabilities in the lease area for equipment, so it’s a very exciting time.                           

Lucy: Interesting, sounds like it! I wanted to thank you all again for joining us here today, Pete, Romeo, Myles, again we’re live in Orlando at the Financials 2014 event and thank you so much! Thank you, gentlemen.

Panel: Thank you.            

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