The introduction of new leases accounting standard AASB 16 Leases (‘AASB 16’) brings added complexity to a public sector entity’s reporting requirements.
In what is already a challenging time for organisations around the globe, many public sector entities are foregoing these complexities altogether and opting to outsource their AASB 16 lease accounting to third party services.
This approach minimises the chance of error, avoids potential headaches, and allows existing resources to focus on the more judgemental areas, as well as their ongoing BAU responsibilities.
Why outsource?
Taking effect for most public sector entities from 1 July 2019, AASB 16 is technically complex and challenging to operationalise. It introduces new measurement requirements and a need to monitor and recalculate balances on an ongoing basis.
This is particularly challenging for public entities managing high volumes of leases, which will now need to bring materially significant assets and liabilities onto the balance sheet – with associated impacts on fiscal aggregates.
“Ongoing compliance with AASB 16 is a particular challenge for the public sector. Public sector entities tend to have larger fleet and leased property portfolios, which usually result in a higher churn rates or frequency of changes to lease payments that require remeasurements,” says Marina Shu, Associate Director, CFO Advisory at KPMG.
KPMG is seeing many of its large public and private client base outsourcing the manual AASB 16 activities of their finance function – engaging third parties to handle the data capture, data entry, and ongoing calculations. This allows their core finance teams to focus on the areas that require judgment and specific expertise – which are arguably more important in the current environment.
Leave it to the experts
The application of AASB 16 is uncharted territory for many finance teams. Due to the complexity of the new requirements, entities are outsourcing their responsibilities to AASB 16-focused managed services to access better practice.
This provides finance teams with greater confidence in the accuracy of their lease accounting and compliance whilst, with the right service provider, still being able to maintain visibility over changes and transparency throughout the process. In fact, some third-party providers allow even greater oversight of the lease accounting process. with real-time access to all relevant lease information, anytime, anywhere – including an audit trail, providing full visibility of the process.
Minimise disruption for teams
Some entities are trying to absorb the new AASB 16 lease accounting activities into their existing finance teams, which can cause a significant disruption to BAU roles.
“Application of AASB 16 is resource intensive – on transition and going forward. In the current environment, with constraints on headcount and finance teams being stretched by new and unplanned challenges, many public and private sector organisations are rapidly finding they need help,” says Andrew King, Partner, CFO Advisory, KPMG.
Teams tackling this in-house often have limited bandwidth to upskill, monitor, select and implement technology systems. Some teams are calculating or checking lease journals using manual calculations or “DIY” spreadsheets.
Where entities are turning to technology to ease the load, many are finding the process of selecting a vendor, training staff in new systems, maintaining lease portfolios and reporting to be time-consuming and cumbersome.
“Where organisations have large lease portfolios and/or changes to their leases, there is a greater need for technology involvement. However, even where systems have been or are being implemented, many are finding the process of implementation, testing, and training to be challenging,” says Shu.
These technology solutions are costly, when you consider ongoing system and internal process expenditure, and the additional headcount needed to operate these systems. Outsourced lease accounting services, by comparison, can offer a more flexible alternative – for example, KPMG’s Lease Hub, which provides clients access to end-to-end AASB 16 lease accounting for just a single monthly fee for a cost-effective service.
How to choose the right service for you
“We are seeing a developing trend – particularly in the public sector – to outsource AASB 16 accounting activities,” says Shu.
The AASB 16 accounting process is generally reliant on a data set that already sits outside of ERPs (enterprise resource planning systems) or general ledgers, which makes it simple for managed services to access this information.
“The process lends itself to an easy “carve-out”, avoiding the distraction of full system implementations and offering organisations better workforce agility,” says Shu.
So how can you choose a managed service that’s right for your needs?
King recommends asking the following questions:
- Do they have an appropriate understanding of the technical accounting requirements that underpin any technology performing the calculation?
- Is the service supported by a robust lease calculation engine, adequate quality controls and reviews?
- Given AASB 16 impacts more than just the finance team, will the service also connect with the non-finance business units impacted – across multiple locations – whilst providing finance/management with oversight over the reporting process?
To find out more about AASB 16, including best-practice advice and tips to remain compliant, head to the KPMG website. There you can find out more about KPMG’s Lease Hub, a managed service providing AASB 16 compliant lease accounting.