Using analytics to reduce the specter of capitalizing all operating leases[Infographic]

Josh Leonard
Partner, Real
Estate Consulting,
Deloitte Financial
Advisory Services LLP

 

Use any metaphor that comes to mind: going down the rabbit hole, stepping into the looking glass, landing in an alternate universe—whatever your preference, the depiction is apt. When Financial Accounting Standards No.13 (FAS 13) goes away and new operating lease accounting rules takes effect, there will be disconcerting, monumental change in many companies’ balance sheets, and it is not likely to be a pretty one.

As things stand now, companies can account for operating leases off balance sheet. Not so when the new changes come into play. At a stroke of FASB’s pen, approximately 1.5 trillion dollars’ worth of operating lease expenses will be need to be capitalized (which had previously been shown only as a footnote to the financial statements) which will add some really ugly numbers to the balance sheet for companies whose portfolios contain big chunks of real estate and leased equipment.

Scary as it sounds, though, the rule change is not the bogeyman here. Almost everyone will have to comply; the playing field will be level. That would be good if companies knew what the playing field looked like. Most do not. In fact, according to a February 2011 survey by Deloitte, 93% of companies are not prepared to comply with the new standards. A little more than 66% have not even analyzed the possible effects the change will have on their business.1

It does not really need to be said that these numbers are frightening, does it? Many companies in the survey did not have a good handle on what they should do to deal with the changes. Abandoning leasing toward acquisition was the choice of 25% of respondents. Some 40% said they would look at shorter term leases that would have a lesser effect on the balance sheet. Another 44% said they would try to alter lease terms. It is going to be a real upheaval.

What to do? Crystal balls would be good. Maybe one of those 1970s' magic eight balls would do. Do not have one? No problem; they do not work anyway. What does work is a commitment by companies to face the problem and use the data at their disposal to look at the numbers and try to understand how the changes wrought by the significant changes to FAS 13 will affect the bottom line.

Absent black magic and outdated toys, there is an option that companies can use to help them understand how the changes will affect their business. Analytics is that option. Analytics techniques such as scenario analysis and predictive modeling can provide companies with the ability to look at the future, play around with it, and try to build best-case scenarios to deal with the massive changes FAS 13 will bring.

As an example, let us look at what will happen to the balance sheet and the profit and loss when the new rule takes effect. You can take all of your operating lease information, run scenario modeling on it, and look at it over multiple time horizons—say one year, three years, or five years. You can see how capitalizing these operating leases will hit the books in the short term and the long term. You can answer questions, such as “How is this going to look on my balance sheet over time?” and “How is this going to impact the bottom line?” You can also figure out the implication of lease versus buy over time.

That is only one example of the power of analytics. Companies can also use analytics to model tax changes, buy-versus-lease options, lease-term options—the list is almost endless. The point is that using analytics can help companies get out of that woeful group of the 93% of companies who are not prepared to deal with the significant changes in FAS 13 and move into the group that is prepared. The new lease accounting is coming, no doubt. Which group do you belong to?

[1] A Deloitte survey on the FASB's proposed changes to lease accounting standards, 2011

Subodh Naik
ERS Director,
Deloitte LLP

Using analytics to reduce the specter of capitalizing all operating leases

Much has changed since our original research findings, which were published last year. There has been extensive ongoing debate about the finer accounting aspects of the standard—and a final standard will most likely be issued in 2013. Still, many companies are only beginning to realize the sheer magnitude of the efforts involved in inventorying their total population of leases and collecting necessary operational and financial data to support the requirements of the standard.

In my opinion, the industry should take a dual approach. First, industry leaders should voice their points of view to the FASB to refine the exposure draft where there is a compelling argument to be made. Simultaneously, they should also commence efforts to gather lease data in a systematic and organized manner so that they will not get caught flatfooted when the standard is issued. Finally, because of the significance of the issue, the sooner companies begin this effort, the better off they will be when it comes time to implement!

This publication contains general information only and Deloitte Financial Advisory Services LLP ("Deloitte FAS") is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser.

Deloitte FAS shall not be responsible for any loss sustained by any person who relies on this publication.

As used in this document, “Deloitte” means Deloitte Financial Advisory Services LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/ about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2012 Deloitte Development LLC. All rights reserved.
Member of Deloitte Touche Tohmatsu Limited

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Value-based Pricing for Pharmaceuticals

Health care reform and industry trends are driving pharmaceutical (pharma) companies to rethink strategy in their U.S. pursuits. Value-based pricing—the alignment of incentives between purchasers and manufacturers—is a paradigm shift that calls for companies to provide pharmaceuticals that demonstrate real, measurable value, and to innovate in their approaches to commercialization and pricing.

Value-based pricing for pharmaceuticals: Implications of the shift from volume to value, an Issue Brief from the Deloitte Center for Health Solutions, summarizes what is known to date about value-based pricing and identifies opportunities for additional exploration. The study’s topics include:

The impetus for value-based pricing for pharmaceuticalsExamples of previous value-based agreementsBarriers to implementing value-based pricing for pharmaceuticalsPossible benefits of value-based pricing for pharmaceuticalsConsiderations for stakeholders: pharma companies, health plans (private and public), employers, PBMs, prescribers/health care providers, consumers, and policy-makers (state and federal government)

Successful, widespread implementation of a value-based pricing system is dependent on key actions such as developing and adopting useful and workable value metrics, providing adequate reward for value, and establishing electronic exchange of health information to capture data from the entire consumer experience. All stakeholders must collaboratively work together to help ensure these key actions are achieved.

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What is keeping CFOs up at night?

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Some core concerns of CFOs, such as ongoing external volatility, are obvious, while others, such as time creep, threaten the overall performance of finance itself.

The pressures on CFOs are enormous — and mounting. Some, such as the ongoing external volatility, are obvious, while others, such as time creep, threaten the overall performance of finance itself.

But what risks are actually bubbling to the top for CFOs, and which ones are bubbling over?

To answer that, we have gleaned information over the past two years from our CFO Forums, our CFO Transitions Labs, and our CFO Signals survey. And in this issue of CFO Insights, we list our top 10 core concerns of CFOs and outline why they are leading to so many restless nights.

Download the full CFO Insights article, What is keeping CFOs up at night?, above to learn more.

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What is your data trying to tell you?

Uncertainty, issue convergence and factors beyond your control will continue to transform market places, government and business in the foreseeable future. And that’s okay. Understanding that transformation, how it impacts your company and what to do about it enables you to use those changes to your advantage.

Transformation is here, and to worry about it or delay its progress will only cost you in the end. Instead, use it as fuel for accelerating ahead.

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see http://www.deloitte.com/view/en_US/us/About/index.htm for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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What strategic buyers want to know about structuring the perfect M&A deal

The consummation of a strategic acquisition is never easy, whether you’ve done it once, or a number of times. In fact, at times the complex reporting requirements of the business combination rules can make the process seem overwhelming.  Getting advisers involved early, having a view as to what others are doing in the marketplace, and successfully navigating a few of the more complicated areas, however, can be extremely helpful in ensuring your deal meets expectations rather than falling short of its mark. 

This latest M&A insights article addresses some of the questions most frequently asked as companies try to structure and account for the elusive “perfect deal,” and also highlights a few pitfalls along the way.

As you think about the possible value proposition of your current deal, you might be asking yourself – “What am I missing?”

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What’s next? Perspectives of health technology officers

Health care information officers face myriad challenges as they work to address their organizations’ information technology (IT) needs, from ICD-10 conversion to adoption of electronic health records (EHRs), among others.

The Deloitte Center for Health Solutions recently interviewed health system Chief Information Officers (CIOs), Chief Medical Information Officers (CMIOs) and other informatics leaders (collectively referred to as “CXOs”) from a broad range of U.S. hospitals and health systems on their activities and attitudes about IT and data management. The results show widespread agreement about key issues, but often strikingly different views about priority and need.

This Issue Brief features interview highlights, conclusions, and implications for health care industry stakeholders. Among key findings:

Each CXO’s starting point is different, so priorities and strategies vary.Drivers to aggregate data differ widely, as does perception of need.The ultimate role and value of health information exchanges (HIEs) remain unclear as “private” HIEs become part of physician alignment strategy.

Given increased pressures and requirements, CXOs are cautiously optimistic about successful implementation of their IT strategies; however, questions and concerns remain.

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When crafting corporate strategy, should social business be bolted on or baked in?

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Many companies recognize that social business offers new tools and rules for competing in the marketplace. But should social strategy be integrated into the overall corporate strategy? Or should it stand alone?

Social media has amplified customer and employee voices to levels that companies can ill afford to ignore. Today, leading companies are not just listening, but responding – fast. So what’s next? Incremental improvements may not be enough to sustain your market leadership – it may be necessary to embrace the fundamental shift brought about by social business to "change the game" in your industry.

To this end, some enterprises are positioning social business as a stand-alone discipline that informs their corporate strategy. Others see social business as possessing the power to transform business and disrupt industries – and they are diffusing social business throughout their overall strategy. Which approach should you take to put this trend to work for your organization?

Here’s the debate:

Bolt it on.
Social business can more effectively serve the enterprise as a stand-alone discipline, employing sophisticated tools and dedicated resources. Until it is a more mature discipline, social business deserves a page in the corporate strategy book, but shouldn’t replace it.Bake it in.
Social business possesses transformational powers that could disrupt entire industries. Considering people, process, technology - and their convergence – from the start can allow strategists to plan smarter.Leadership’s not convinced.
Executive management is not willing to bet the farm on social – and who can blame them? A smarter approach tests social initiatives in isolated areas and builds from there. If the value is there, you can eventually build a business case that can get leadership’s attention.How much proof do they need?
In many organizations, sales and marketing are already believers in the power of social initiatives, with human resources, recruiting and product development following close behind. But these strategies in isolation are not as powerful as they are together and not likely to generate the potential synergies of a broad strategy.Social business supports small steps.
Sure, social business can improve collaboration and productivity. These incremental improvements are worthwhile pursuits, but they are not going to revolutionize our business.Social business supports big leaps.
Social conversations can trigger expansive, new ways to think about your business and enable innovation. There can be value in serendipity. Breakthrough ideas often come from unexpected places.Why take on a transformation project when a social networking page will do?
It's the domain of marketing and public relations today and they have it handled with our social networking pages and social media accounts.That’s postponing the inevitable.
Even on a small scale, you’ll need people to manage systems and interactions – not to mention security and integration issues that are likely to occur. Plan to disrupt or risk being disrupted.My take

Chris Heuer, Specialist Leader, Deloitte Consulting LLP

Can social business deliver more potential value when it’s baked into a company's strategy, or when it stands alone? The answer varies from industry to industry, but if you want to increase the chance to win, bake it in and enjoy the sweetness of a warm chocolate chip cookie. Consider changing your thinking and then changing your strategy, to meet the changing dynamics of the market. Make big bets – but make them smart bets – to out-compete others in your marketplace.

For example, the risks and rewards for consumer-facing companies are often clear, so their social initiatives tend to be more far reaching than those of business-to-business companies. And, regardless of industry, collaborative cultures are more likely to create greater value, improve performance and enable you to retain talent.

You can start from where ever you are. If your organization has leadership support and a track record of effective bottom-up social initiatives, think big. How could your core processes and capabilities be reinvented to create more value, more quickly, in a society that’s interconnected by expanding social networks?

But if your organization is not ready to incorporate social business strategy across the enterprise, start small. Focus on building a solid business case based on results that are measurable and attributable. Stand-alone initiatives – with the big picture in mind – can be used to introduce a social mindset to leaders and employees that supports enterprise-wide collaboration and idea sharing, paving the way for more broad social strategies.

Sometimes it’s important to do something first, but often it’s more important to do it well. Companies that do social business well – building corporate strategies that align the passions of their people with the needs of their customers – hold the potential to not only capture their market, but to create passionate, loyal customers AND engaged employees.

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As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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