Accurate data sequencing and entry is integral to effective lease portfolio management and when not done correctly can severely impact the forecasting, data quality and IFRS-16 compliance of your company. This article looks to address the three most prevalent errors in data sequence input when using modern lease management software; Backdating, Adjustment Overrides and Data Integrity Issues.
Welcome to LeaseInfo’s weekly blog. This week we will be exploring the impact of inaccurate data and the three most common ways which the data entry is input incorrectly. Additionally, LeaseInfo’s accounting and finance expert Mishal Manzoor has answered these questions and provided step by step solutions to these complex problems.
Why do companies need accurate data?
Before diving into data entry issues, it is important to establish why having accurate data is so important for companies in the 21st Century.
Some of the benefits of high data accuracy in relation to business health and lease portfolio management:
Accounting Standard Compliance
New accounting standards such as AASB 16 (IFRS 16) have burdened Australian Businesses with the task of capitalising all leases on their balance sheets, for both assets and liabilities. This process comes with regulatory compliance. Businesses need to gather in excess of 50 complex datapoints from each of their leases. Data accuracy can ensure compliance with these requirements.
Clear Picture the Company’s Position
Without accurate data, it is impossible for a business to stay on top of the responsibilities and key dates that come with managing a large portfolio. If the date for a market Rent Review or Lease Extension is input incorrectly and the date is missed, it can have repercussions for the company. Moreover, precise data is needed to construct a reliable overview of the company’s portfolio. The old saying you can’t manage what you can’t measure applies.
Easier Implementation of Data
High-quality data is also so much easier to use than poor-quality data. Having quality data at your fingertips increases your company’s efficiency. If your information is not complete or consistent, you have to spend significant amounts of time fixing that date to make it reliable. This takes time away from other activities and means it takes longer for you to implement the insights your data uncovered. Quality data also helps to keep your company’s various departments on the same page so that they can work together more effectively.
Better decision Making
Improved data quality leads to better decision-making across an organization. The more high-quality data you have, the more confidence you can have in your decisions. Good data decreases risk and can result in consistent improvements in results.
Increased Profitability
Ultimately, high-quality data will lead to increased profitability “Data in the new AI”.
Data Entry Issues
Now that the importance of accurate data has been established, lets look at the three most common causes of data inaccuracy within lease portfolio management systems:
Backdating data entry issues
One of the common issues that LeaseInfo has observed is the wrong data entry sequence in lease management systems. Inefficient lease administration procedures can lead to delays in input of lease data creating a situation in which data needs to be entered many months after an initial event has occurred. If there is a lag in the process of signing of a variation agreement between the lessor and the lessee, it could lead to data being backdated into the portfolio management system.
For example, due to the pandemic many tenants have held over leases on a month to month or year to year basis after the lease expires. There may be ongoing negotiation between the Lessor and Lessee after the original lease expires. After a long interval, the tenant agrees to extend the lease contract. This delay extension has an impact on IFRS calculations, as the extension of lease term increases the lease liability balance.
Some lease managements software systems are designed with data security protocols. The system may have a lock control measure to prevent data from backdating calculations. However, some users of these software systems prefer to lock at the end of the financial period. As the user keeps the system open till the next financial period close date, there is a higher probability of data modification throughout the 12-month open period. Therefore, data entry time and sequence is crucial to ensure that the adjustments in ROU asset/Lease liability are not overridden.
Overriding adjustment issues
When data is entered into a lease management system, adjustments (such as CPI) can mistakenly be overwritten leading to inaccurate modifications and reinstatements. For this reason, many Lease Management Systems do not allow users to override an adjustment in ROU asset/ Lease Liability in case the user changes the lease data sequence.
Example:
A lease commences on 01-February-2020 and rent increases on the anniversary date. The rent review type is CPI. The CPI review gets released for the Forth quarter 2019, and CPI review adjustment in ROU asset/Lease Liability takes place on 01-February-2020. After the system remeasures the asset and liability based on CPI, the deed of variation is signed between the tenant and the landlord which was pending for the past six months. The variation clause has lease extension 2 years and tenant wants to adjust asset/liability on 01-September-2019 as he knew on this date that the term of the lease will be extended.
As the CPI review adjustment is already in place the system cannot override the adjustment on 01-Feb-2020 and post adjustment on 01-Sep-2019 in an open period. Otherwise, this can create reconciliation problems for those users that post journals on monthly basis. Therefore, the Lease Management software prevents getting backdated and doesn’t allow the system to override adjustments.
Furthermore, there can be IFRS calculation issues due to the wrong data entry sequence for different types of variations. For example, entering lease extensions which have adjustment dates in Sept 2020 prior to rent concessions that start in the month of April 2020. If you enter lease extensions before entering the rent concessions, then the Lease Capitaliser will not read rent concessions later when you enter in the lease management system because the system prevents you from overriding the asset/liability adjustments as discussed above. In this scenario, the lease extension adjustment would take place on 01-sep-2020, and the rent concessions from April to July 2020 will totally be missed in the IFRS calculations due to the wrong data entry sequence.
Some examples of correct sequence are:
Rent Concession: Start Date: 01-Apr-2020
Lease Extension: Adjustment Date: 01-May-2020
Data Entry Sequence: Add rent concession details prior to lease extension details
Rent Concession: Start Date: 01-Apr-2020
Lease Extension: Adjustment Date: 01-Apr-2020
Data Entry Sequence: Add rent concession details prior to lease extension details
Rent concession 1: April- June 2020(50% Waiver)
Rent concession 2: July- October (100% Waiver)
Data Entry Sequence: rent concession 1 details need to be entered first
Mishal Manzoor Head of AASB16 solution at LeaseInfo stated:
“The biggest issue in entering the data sequencing incorrectly. This could create overlapping of adjustments and lead to service errors of which can be difficult and time consuming to rectify”
Summary
In closing, data is an essential component of lease management and when entered correctly and in the right order can lead to lasting and substantial benefits to your business. That said, the consistency and timeliness of data entry can be often hinder the quality and content contained within a lease management system. Without the right training and systems data entry complications can cause compounding effects over time. We hope that this article has addressed some of your key questions regarding the importance and correct input of lease data, for mor information contact our expert leasing and accounting teams.
Author
This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.
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