Depending on your reporting year, AASB16 is either approaching rapidly or is still a little way away. For the majority of Australian companies whose year end is 30 June, adoption of AASB16 will occur on 1 July 2019. In our conversations with accountants and treasurers, it is clear that as the transition period approaches the mind is getting very focused as the reality of the work required to manage leases under the new standard settles in. We’ve heard from many companies who plan to run their lease portfolios in Excel – but we only hear this from those who are still some way from transition. No one who has spent significant time looking at the standard is genuinely considering running their AASB16 obligations in Excel – I’ll explain why it’s a bad idea in this article.
AASB16 is the new Lease Accounting standard that applies a significant change to the way that operating leases are accounted for. Through a process of financial engineering, the reported nature of operating leases will convert from operating cost to be recognised on balance sheet as an asset and a liability.
At the outset, I should make it clear that as a general rule I am not anti-Excel – quite the contrary. Those who know me know that I am capable with Excel – I even used to sell spreadsheet templates that I created! I have built an entire lifecycle solution to AASB16 in Excel, and we initially considered releasing it as an MVP, but in doing so it became increasingly clear that this just wouldn’t work.
So, based on our experience, here are the 3 reasons we believe trying to solve AASB16 with spreadsheets is a bad idea:
1. Initial solution is easy, lifecycle is complex
Building an initial solution to AASB16 is conceptually easy in Excel. It involves just a couple of steps:
- Forecast the cashflows,
- Discount the cashflows back to calculate your asset/liability,
- Amortise your asset and create a debt repayment schedule, and
- Calculate your journals from step 3.
The spreadsheet required is not particularly large in the first instance, and there are a couple of nuances – such as the assumptions around compounding of interest. Over time, however, the spreadsheet will grow as variations required due to changes such as CPI indexing will require the creating of new schedules. In our experience this is where the difficulty in a spreadsheet-based approach is most problematic. As your model grows to 20+ sheets and tens thousands of cells the possibility of introducing errors also increases.
2. Governance is difficult
The introduction of errors in spreadsheets is particularly problematic, as governance is one of Excel’s key challenges. With many team members over time accessing the spreadsheet, the chance of error increases exponentially. If you have a property lease spanning 15+ years, it is guaranteed that at some point someone with absolutely no understanding of the spreadsheet will be working on it. Furthermore, when an error is introduced, it may be a significant period of time before it is uncovered, and rolling the spreadsheet back will be time intensive and frustrating.
3. It’s too expensive
“What?! But Excel is free!”, I can hear you exclaim. Excel is inexpensive – you already have it installed on your computer. Despite this, your time is not free, nor is it inexpensive. It will take a significant amount of time to establish the spreadsheets for your AASB16 solution, more time to check them, and then more time again to run the leases through their life. Add to that the time taken to unpick and rollback errors, and your Excel solution to AASB16 is significantly more expensive that you initially estimate.
So what to do?
We built the Leases16.com lease accounting platform as a direct competitor to Excel in the management of your AASB16 obligations. When you take your time into account, our simple inexpensive pricing model will ensure that managing your leases through our platform is less expensive than attempting to do it yourself.
If you are interested in trying out the platform, we are giving Beta testers free access for 3 months – just email us at firstname.lastname@example.org to get the code.