Lease accounting regulations are only a few years old and many companies have scrambled to find a solution to comply with these new financial reporting obligations. Just as these companies were scrambling to find a solution, the software vendors were scrambling even harder to develop new lease accounting applications. The quickest way vendors did this was to repurpose other business applications by adding additional codes to generate the required calculations and reports. There was little opportunity to assess industry and regulatory requirements and design robust applications from the ground up.
The definition of a “sunk cost” is a cost that has already been incurred and cannot be recovered by any means. Finance and IT executives will be inherently resistant to change any business application or technology, especially if they spent significant time and effort implementing the system, in addition to the actual cost of the application. There will always be a strong reluctance to walk away from the current solution even if the solution is considered flawed or not delivering full value for the investment.
If an organization is open to consider looking at a new lease accounting solution, their first reaction will still be, “is the new solution better or is there a risk of throwing more money at another bad solution?”. If there is any doubt that your current lease accounting solution is not delivering accurate and reliable lease calculations and not allowing your staff to be as efficient as possible in managing this information, then you need to look for a better solution.
If you have sunk costs relating to the initial set up of a lease accounting module/spreadsheet, the costs incurred related to gathering lease agreements across the organization do not need to be spent again. This data can be moved electronically into a new lease accounting system.
Another benefit that is often overlooked in assessing sunk costs is the intellectual property gained on how the system is used and how information is managed. It is common for a company to have a “partial lease accounting solution” where staff still need to manually reprocess and recalculate their lease information to get more reliable and auditable disclosure reports they can trust. Taking this knowledge and then looking for the right lease accounting application leads to better accounting solutions.
Remember, its never too late to remove technology that is not working for you. If your current lease accounting system is not meeting your business requirements, if you are not achieving optimal efficiencies in managing your lease information, or you consider your ongoing costs too high – reach out to learn more what Black Owl can offer.