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Keeping Tags On Your Assets
January 6, 2011 Leave a comment
Some old fashioned truths were brought to the fore at LeasingWorld Expo, which lead Nic Evans on to a high tech solution for a very current industry challenge.
Mark your card
“Mark your card” said the magician. I wrote my initials and a smiley on the four of clubs before holding it firmly down on the bar in the Tattershall Castle. With hindsight it was inevitable that my card should have gone from under my hand. The mystery remains of how it got to be folded and gripped by a paper clip in the magicians hand, which had remained in clear view of both myself and the esteemed editor of Leasing World.
This incident took me back to the FLA Seminar earlier that day at LeasingWorld Expo on Responding To Higher Credit Risk. I expected a discussion on the finer points of credit analysis or risk weighted pricing. However Robert Munn of Total Asset Recovery took us back to a much more fundamental truth. “In this challenging economic climate, as credits are more difficult to underwrite, the Asset is your key collateral. This needs a proactive approach to asset management”
The key questions that Rob posed at the seminar are:
- Does the asset exist? – Speak to dealers and suppliers. Physically inspect some of them.
- Is it correctly priced? – Check asset prices – from manufacturers’ price lists and by physical inspection.
- What’s the asset worth now and over time? – Get a market valuation prediction.
- Are you buying what you think?
- What’s your audit policy? – Audits counter fraud
- Will the asset be there if the dreaded day comes? – asset marking is an important often neglected activity in fraud mitigation
We have all been there:
- The Credit Director wanders into the IT department asking “Could you just look down this list of kit and see if the prices are reasonable?” “Well that must be a great laptop at that price!”
- The unseemly rush of funders trying to get ahead of the receivers as they make sure that their assets are clearly marked.
- Dawn raids on dodgy Essex motor dealers with suspiciously empty forecourts.
Return to ‘Old Fashioned’ lending
There is no money in being wise after the event. “Return to ‘Old Fashioned’ lending – get to know the customer and treat your asset as core collateral” says Rob. He went on to show some of the practical inspection services and asset marking services that Total Asset Recovery offer. A DNA datadot, less than 1 mm across, can be invisible to the untrained eye, but contain more information to identify an asset than an easily removable serial number sticker.
Clearly the power behind such identification is the central asset register. The Vehicle Finance Industry is familiar with the HPI database – and that is clearly a major protection against asset fraud.
“Why haven’t registers been adopted for other sectors?” came the question at LeasingWorld Expo. In technology serial numbers are widely used – although the Service Tag seems tightly managed by the manufacturers. Could they have a vested interest in controlling this connection to their customers rather than sharing a central register? Technology funders such as 3Step IT also offer services for asset tracking and management, giving lessees online access to maintain additional information on their equipment, such as cost centre and location.
Chips with everything
In the last decade the use of technology for identification of assets has become very established. The principle technology in this area is Radio Frequency Identification or RFID.
The basic version – Passive RFID – has chips that respond with their identification when scanned. Chips can be embedded in an asset, which makes them hard to remove. This technology has already gained acceptance in financial services for micropayments, with toll road payments, touch n’ go payment cards and London Transport’s Oyster Card. While such “electronic purses” usually don’t hold balances on the chip, the storage on these chips can be large as is seen with their use in biometric passports. The security of such sensitive information is an issue, with reports of data being read off the passport over several yards, even though shielding is now built into the covers of US passports.
Another limitation of this passive technology is clearly demonstrated by my dog Clover: despite being ‘chipped’ – which gives her buttock more intelligence than her head – this is no help in finding her when she escapes. Active RFID overcomes this limitation by having a powered chip that can transmit up to 50 feet using Wi-Fi technology. This can be increased to a distance of several miles by using mobile phone technology, which allows tracking across the coverage of mobile phone networks, and finding the location by measuring the distance from several mobile phone masts.
Location, Location, Location
“The primary benefit of this technology to the funder is the security of the asset.”
says Adrian McMullan of L&A Consultants, who specialise in integrated resource management for fleet and logistics operations. “If you are concerned over the location of vehicles, alarms can be set that will notify you if the vehicle passes way points such as approaches to ports. It can be covertly equipped in the dashboard or under the engine – there are so many black boxes in a modern vehicle it is hard to remove.”
At his desk or on the golf course?
Such pervasive tracking does resurrect the old tachometer “spy in the cab” arguments, with a very modern twist of internet privacy. Indeed it has even been controversially suggested that companies should use this to measure the effective use of some of their more expensive human assets – keeping track of their sales force by the location of their mobile phones.
Once you have this connection to track your assets almost wherever they might be, then clearly they can also communicate more than their identity, but also usage and service data . This starts to open up new opportunities for leasing and equipment rental:
- Copiers that send in their own meter readings.
- Cars that not only say how far they have driven, but how fast and even how well.
“You can get real-time mileage capture for vehicles, which both warns of excess usage and prevents clocking.” says McMullan. “Both funders and insurers ask us to provide Incident Data Recorders – IDR – that are triggered by extreme deceleration. They will record speed and other measurements every tenth of a second for thirty seconds before the deceleration and fifteen seconds after. Insurers use this to find who was at fault for an accident. Funders can check that repairs have been carried out to protect the value of their asset. Hitting a kerb may not visibly damage bodywork , but the funder can see that the impact could have damaged the chassis.”
Getting Connected
Such “Smart” telemetry can fundamentally change the whole economic relationship between the asset and the user. “Once devices are connected and their use can be metered, there is no longer any need to buy them.” says the Economists technology correspondent Ludwig Siegele, in his recent report on Smart Systems.
“Once devices are connected and their use can be metered, there is no longer any need to buy them”
Which car shall we use today?
In London, and several US Cities, members of Zipcar simply logon to find the nearest vehicle (that reports its own position by GPS), unlock the car with another RFID chip in their membership card, use it by the hour and then return it to any of the allocated parking bays across the city. You can look for the nearest estate car if you have a load to move or make a ‘lifestyle choice’ for coupe with a sunroof and an adapter for your iPod
Rolls Royce offer in-flight monitoring for their jet engines, that not only lets them charge airlines a fixed cost per flight hour, but also allows them to predict when maintenance will be needed, which increases aircraft availability. (It is not known whether this showed any problems with the Rolls Royce Trent engine that disintegrated on the Quantas A380 over Singapore in November.)
Paying for service
Now the IASBs Draft Exposure places new requirements for lessee capitalisation and complex accounting calculations. It is widely expected that this will drive a large move toward service contracts in order to keep assets, particularly non-core assets, off the balance sheet. This will mean many finance industry changes:
- from copier rental to managed print services,
- providing the use of a car, rather than lease of a specific vehicle
- even paying for thrust rather than financing a jet engine.
Use of such smart systems to remotely monitor usage clearly allows charging for a service rather than the right to use an asset.
Could we even see city car sharing schemes like Zipcar coming to the company car park?
A message behind the Boris Bike?
Perhaps the sponsor’s message on the back of the “Boris Bikes” now being rented around London is a sign that one bank has already spotted this opportunity in technology-enabled short-term service contracts?
This Article appeared in January 2011 Edition of LeasingWorld.
(c) Nic Evans 2011. This Article may not be reproduced, in full or in part, without the prior permission of the author.
Nic Evans is an independent consultant and interim manager for commercial finance technology and business agility. He is an affiliate at Invigors LLP. If you want to discuss any points raised by this article or broader issues he can be contacted by email nic@nicevans.eu or through LinkedIn http://uk.linkedin.com/in/nicevans
Get Set for Leasing Systems Shake-up.
December 1, 2010 Leave a comment
Will IT ease the pain of IASB change? asks Nic Evans.
Debate has raged on both sides of the Atlantic throughout the leasing conference season about the International Accounting Standards Board (IASB) proposals for lease accounting. The exposure draft (ED/2010/09) was the subject of a public meeting in London on 5 November, hosted by the FLA and the UK Accounting Standards Board.
Whatever happens as a result of responses to ED/2010/09, significant change is certain. “Lessee capitalisation… is set in stone,” IASB member Pat Finnegan says. “The financial crisis has really dictated that accounting standard setters take a very serious look at current accounting models and not proceed on the glacial path that they have been following for many years.”
How should the industry manage such change?
Be prepared
Nick Pattenden, MD of specialist finance pricing supplier Field Solutions, says: “The thing to do now is to get back to the IASB and say, ‘This will be the effect on my business and this will be the cost’. Do the benefits of the proposals outweigh the costs to us and to our customers?”
Having submitted comments to their national Accounting Standards Board, companies should start to plan. “Time spent planning is never wasted. If you plan for the worst, it won’t be wasted if things don’t turn out so bad. You will need system resources and adequately trained people,” Pattenden says.
A lot of preparatory work can be started now.
“Finance companies will need to review the impact to the business from A to Z and then assess the impact to their systems,” says Ian Charik, Cassiopae asset finance director.
Implementation can be scheduled as soon as the timescale for the new standard is published. Management should avoid other systems-related work, such as mergers and acquisitions, during this time.
Impact on sales behaviour
The complexity of lessee capitalisation may put off many potential customers from leasing. Equipment funders are already hearing from large lessees they will stop leasing for non-core assets.
At the London meeting, Mark Venus, BNP Paribas accounting and reporting and chair of LeaseEurope accounting committee, said: “A purchasing manager whose job today is to rent photocopiers will need to be trained in law and accountancy to be able to analyse the contracts for each photocopier, and to provide estimates back to head office of likely outcomes for each lease.”
Funders may, as part of the sales process, need to provide additional information and illustrations, with independent verification, to help lessees. Treasurers and CFOs may need training about the benefits of leasing.
ED/2010/09 fails to distinguish between lessees’ core assets and fungible assets, like copiers and cars. “In these areas we will see a move toward managed services, and even to contract rentals where, rather than lease specific vehicles, users are provided with the service of a car averaging, say, 18 months old,” Pattenden says.
As the new standards change the timing of funders’ profits from the lease, will this change methods of pricing?
Pattenden claims that in smaller ticket deals sales will still be driven by money over rate of return. “Sales people won’t keep in mind accounting profit. But there will be a less direct connection where business development will target sales of particular products,” he adds.
David Maxwell, director of Classic Technology, says: “While the accounting standards shouldn’t be driving commercial decisions, funders are going to want to see year on year profits. And while the IASB have tried to do away with structuring, this will continue – just in new areas. For bank regulated funders and where there are any tax benefits the pricing will also change.”
Tipping point
ED/2010/09 has a clear impact on lessors’ administration and accounting systems.
FLA chair of asset finance George Lynn says: “To demonstrate the level of complexity we reckon that there are at least 75 steps that you have to go through to get the information that is required for the new methods. To put that in context, there are 10 steps required for a current operating lease, and about 30 steps for a finance lease.”
Cassiopae’s Charik adds: “A lot of systems, on both sides of the pond, have the accounting treatment hard wired – even to the extent that lists of products can’t be changed.”
Joe Franco of IDS sees a similar impact in the US. He says: “The impact of the changes was clearly demonstrated at our recent ELFA National Conference: attendance at the sessions discussing the lease accounting changes was high. And you are also right that most of the systems are hard wired.”
CHP Consulting senior manager Nick Pattison says: “A significant number of companies will have to look long and hard at their systems. This will be the tipping point for a number of lessors, particularly those who have keeping in-house systems going over the years. It will be a significant investment to make the changes needed to in-house systems.”
Lessors who already have modern, highly configurable, systems will have a significant advantage.
“Any changes that do have to be made to our software will have a lot less impact,” Pattison says. “It will be keyhole surgery rather than an open-heart operation. This will save significant time on implementation and re-testing.
Charik says: “Any software changes that are needed will be provided under our support agreements at no additional cost to our customers. We give the guarantee of compliance in each country where our software is operating.”
Pattison believes that making the software changes is not the expensive part, and that the bigger project will be to apply the new lease classifications across the current portfolio. “Performance obligation, derecognition or they may no longer be classified as leases, but rather installment purchase or service contracts,” he says. “There are a number of areas where discretional decisions have to be made. A big ticket lessor can look at each lease but the smaller ticket business will need to apply rules based on contract data. CHP’s ALFA has the business rules engine to automate the decision and it stores contract information at the most detailed level, enabling it to be used as the basis for the classification.”
Multi-GAAP
White Clarke Group chairman Ed White says: “CALMS has been designed to have multiple accounting methods, so you can see the impact of the new methods alongside the old operating and finance leases. A rules-based system allows you to incorporate processes to make consistent judgments needed for the new standards. It will be a lot more work for lessors without this, which will significantly add to their costs.”
Charik says: “Multi-GAAP allows parallel running, with the old treatment running alongside the new methods. Cassiopae allows multiple strings, but systems with just one set of books, or even dual accounting, will struggle.”
Pattison says: “In countries where the take up of the new methods are different you can keep local GAAP, while also using IAS when the parent chooses to adopt it.”
Even companies using compliant packages will face problems if they are running on older versions of software. They may be tied to a particular version of software because of customisations, or they may have held off upgrading because of the effort and cost involved.
Interfaces will give further challenges. The feed of information on new business coming from customer relationship management and point of sales systems will need to be modified. An interface inevitably involves changes to two systems, so this can considerably add to the complexity and timescales for change. Although a lease administration system may be fully configurable for new financial products, the front end systems will be more constrained. Few accountants like to entrust lease classification to their sales force.
Lessors and major lessees will at an early stage need to model the impact of the accounting treatment on their current portfolios of leases.
Pattenden says: “A lot of people will look to Excel to do this job, but this is fraught with problems. We have software that will manage portfolios, but it’s not just a case of plugging it into your database. Data acquisition is the difficult part. No two package software installations are the same. It is a consulting exercise so everyone understands how the data is being used and the assumptions that are made.”
While transitional arrangements for moving to the new standard are still to be agreed, CHP claims its ALFA has another advantage. “We can make mid-life changes to lease income without the need to terminate or rebook the lease,” says Pattison. “This also has an effective date which allows us to make the changes retrospectively, or just going forward.”
What will be the consequences for leasing companies and their customers if the deadlines are not met?
Pattenden says: “Failure to meet the deadlines would be disastrous. It’s a regulatory issue that you can account for your full business, current and future.”
ED/2010/09 – call to action |
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An edited version of this article appeared in December 2010 Edition of Leasing Life.
A printer friendly PDF version of this article can be downloaded from https://www.box.net/shared/vk9s3b5gjl
Nic Evans is an independent consultant and interim manager for commercial finance technology and business agility, and he is an affiliate at Invigors LLP. Nic may be contacted by email nic@nicevans.eu through LinkedIn http://uk.linkedin.com/in/nicevans .
Go Forth and “Multi-”ply
May 1, 2010 Leave a comment
Going multinational opens up multiple extra dimensions in system complexity. The biggest strategic efficiency for multinational systems is gained by having front-end, administration and accounting systems that can travel in these extra dimensions
Multi-Format – Culture-specific number formats (thousand and decimal separators) currency symbols (prefixes or
suffixes) and date formats are essential to present users with the basic data in a familiar and unambiguous format. Supporting phone numbers of the right length and postal codes in the appropriate format and position in the address will allow efficient processing. I have seen collections systems where non-US format customer phone numbers had to be stored in a separate field displayed three screens away from the arrears details.
The systems will certainly need to support the extended western European character set in all text fields, with support for eastern European Cyrillic and Asian double byte character sets if you are going that far. Non-English character sets have a knock on effect with alphabetic sort sequences.
Multi-Lingual. – For international finance companies often the internal “lingua-franca” will often be that of the parent company – or English. While it may be simpler for the organisation to use the same terminology for use of the systems (terms such as “evergreen rentals” doget lost in translation) there are statutory requirements to offer users local language – particularly in France. For customer documentation and invoices then local language is a must. Bear in mind that several countries have two languages, so documentation must either have synoptic translations or the customer must be given the choice of language, as is the case in Belgium and Switzerland. And do you want to offer localisation for regional languages,
like Catalan, Welsh and Basque?
Multi-Currency – Systems must be able to work with several currencies in the same business unit and with
multiple exchange rates. This needs to work at both the transaction level, particularly in the CEE countries where deals are increasingly denominated in Euros or Swiss Francs, and for consolidation. Older systems often put separate currency deals into different portfolios or reporting units which greatly adds to the cost of managing a small part of the business.
It has challenges – for instance what exchange rate do you use to record a multi-currency invoice with a future due date? And when that invoice is paid late what exchange rate do you use then? In addition to your delinquency you have an exchange rate risk.
For consolidation, much management reporting will be based around year start rates and plan rates. But spot rates, average monthly rates, accounting period end rates and even a range of future scenario rates will all need to be used for different reporting, accounting consolidation and exchange risk exposure.
The particularly European requirement for multicurrency is to cope with transition to the euro, which may not be a hot topic at the moment. And even disengagement of a country from the euro?
Multi-Organisation – Seamless online access and reporting across multiple companies is needed, rather than having to exit the application and come back in, or run separate reports. A shared service centre could not be implemented effectively without this. Within a country you may need to have further subsidiaries for fiscal reasons, joint ventures and to separate bank regulated business.
At the same time you need to be able to “slice and dice” reporting across the organisations by major product lines, vendor programs, or channels.
Security, access controls, even database backup and recovery may also need to be specific to an organisational unit.
Multi-GAAP – Rather than restating accounts from local GAAP of an operating company to the parents accounting treatment each month, the system produces multiple accounting treatments concurrently.
This is the most complex of the “multis” but increasingly the biggest benefit: and not just for international operations. With many organisations moving to IFRS this allows parallel reporting in both IFRS and the “classic” accounting treatment – so the group parent can move to IFRS while operating units can adopt at a different pace.
Don’t expect IFRS and the global review of lease accounting rules by FASB and IASB to result in simplification or to eliminate the need for Multi-GAAP. Unless a lessor is of a size to influence the lease accounting in each of the countries where it operates, it will still be faced with country by country interpretations of standards. The need for other accounting treatments may remain for tax and regulatory reporting. Standardisation is likely to have the paradoxical effect of increasing the number of accounting methods you will need to manage.
Credit assessment too will need to accommodate the differing format of financial statements and the level of detail available when assessing potential credits.
Multi-Regulatory – In times gone by, one of the advantages of common finance platform systems was to arbitrage regulation. As long as you weren’t taking deposits in country you could report Bank regulated business through lighter touch regulatory regimes like Sweden or Luxembourg, rather than face full reporting in countries like France, whose BAFI reporting specification ran to 24 volumes. With the renewed focus on regulatory scrutiny in the last two years such loopholes are closing.
If funders are having to report directly to regulators in each country they are now faced with waves of new reporting requirements and with local interpretations of BasleII. Companies like FRSGlobal provide software to support multiple regulatory interfaces, but such software comes with a bank- sized price tag and still requires the data to be extracted from business systems. Even if the parent company is presenting the reports to regulators, the asset finance companies will still be faced from analytical reporting from business data and history to feed the regulators appetite.
These are all complex requirements for a system and not features that can be retrofitted as an afterthought. When selecting a package for multinational use companies must identify the diverse requirements of each country up front – as well as considering future markets – and use due diligence to assure themselves that the solution will meet business needs.
Many advisors, even with international offices, will simply not have the experience of these multi-national considerations – after all few accountants would have a qualification in more than one country.
Don’t be fobbed off with the software salesman’s calm assurance that such features can be customised or are “in the next release”. To misquote Rudyard Kipling “If you can keep your head when all about you are losing theirs, then you haven’t understood the question.”
© Nic Evans 2010.
Nic Evans is Director of Evans Global Associates, delivering consultancy and interim management for international finance technology and business agility. If you want to discuss anything raised by these articles or broader issues he can be contacted by email nic@nicevans.eu or through LinkedIn http://uk.linkedin.com/in/nicevans
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