Economic uncertainty drives changes to leasing of long-lived assets

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Recent events affecting the global financial health of businesses have forced CFOs and treasurers to conserve and preserve cash. Leasing, a long-favored technique of treasurers worldwide, will proliferate in this new environment.

Increasing free cash flow through leasing, which is critical during challenging economic environments, enables both large and small businesses to obtain long-lived assets while maintaining the best and most flush cash position to further fuel their cash preservation efforts. Businesses can increase their free cash flow meaningfully if strategic lease initiatives are undertaken.

With cash management taking hold as a new daily activity, businesses are exploring any and all additional efforts needed to keep daily operations open and enhance liquidity.

As the economic picture comes more into focus over time, we will see potential revisions to initial impairment estimates. In addition, there will be leased and other long-lived assets that, for the first time, will be reviewed and tested for impairment, resulting in partial and full impairments in calendar Q1 and Q2 of 2020.

Navigating uncertainty

The voluminous lease changes and revisions to estimates present a significant challenge to lease accountants, corporate controllers, treasurers, CFOs and their financial reporting teams. If robust functionality in lease accounting and lease lifecycle management systems and related controls does not currently exist, these changes will significantly burden all companies reporting under U.S. GAAP and/or IFRS with lease accounting compliance issues and deficiencies.

A key tactic many in this environment are deploying is a transparent action plan with lessors that focuses on renegotiating the terms of existing leases to include:

Rent abatements

Changing fixed payments to variable ones

Rent forgiveness

Loyalty payments

Interest rate reductions on leases

Partial and full lease terminations

Changes to the length of the term of leases

Changes to incremental borrowing rates

Full lease restructurings

Changes to fair market value of assets and observable stand-alone prices

Additional current and future lease incentives

Changes to estimates including reasonably certain holding periods, refurbishments, asset retirement obligations and gross realizable value

Deals are changing rapidly, estimates are being revised, renegotiations are ongoing, and consolidations and retrenchments are happening. Businesses tackling the added complexity and velocity of changes to lease portfolios and revised estimates, including impairments, will ultimately require robust lease accounting and lease lifecycle management for compliance with accounting standards and management information.

Lease accounting will continue to become more complicated and transaction heavy, due to changes driven by the world economy. To find success moving forward, financial teams must seek systems that automate both lease accounting processes and controls, taking away a great portion of human intervention and allowing for corporate policies and information to be automated. Ultimately, these robust systems will save human capital and create a repeatable result for each new lease or lease modification, ensuring that policies are consistently applied to all leases and comply with existing corporate policy.

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