Understanding Technology’s Role in Implementing the New Lease Standards
As companies race towards the effective date for the new lease accounting standards (January 1, 2019 for companies applying IFRS and public companies applying U.S. GAAP), those with large volumes of leases will be understandably tempted to rely on software to extract information from lease agreements that is needed to comply with the requirements of the new guidance.
While available software tools can ease the implementation of the new standard, it is important that management responsible for the implementation effort understand the limitations of such technology and recognize that using contract extraction software will not replace the need for human intervention to ensure that all provisions in a lease agreement that are relevant to the accounting requirements have not only been captured, but appropriately interpreted.
Most contract extraction software tools incorporate several “out of the box” or “off the shelf” clauses that identify and extract some relevant lease information (e.g., contract title, agreement type, parties, effective and commencement dates, term, termination, general pricing terms). The handful of market-leading contract extraction software providers “train” the platforms through a process in which a “seed” sample of contracts are used to educate the platform on which contract clause or text should be identified under which category (i.e., to associate the contract text with a specific topic such as “lease term”). Most platforms enable the user to perform this same process to build their own custom clauses and categories, but the immediate capability a user receives upon purchase or license of the software reflects the extent to which the provider has pre-trained the platform. These core-offering clause extractions can be effective for providing basic data required to comply with the new standard.