Accounting Standards Codification (ASC) 842 from the Financial Accounting Standards Board (FASB) amends lease accounting guidance, requiring lessees across all industries to recognize most leases on their balance sheet. With the deadline for the new standard approaching, all organizations that report financials according to generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS) must evaluate and revamp their lease management processes. However, the complexities of ASC 842 and level of fundamental accounting changes are difficult to manage in-house, leading many middle market companies to consider lease accounting outsourcing options.
The ramifications of ASC 842 are far reaching, creating or amplifying many difficulties for internal lease management functions. These include:
- Decentralized lease management processes: In many cases, companies do not have an up-to-date inventory of their leases and contracts that may contain leases. Activity often takes place in silos, with the authority to execute equipment leases residing at the departmental level. With ASC 842, lease administration is likely to fall on the finance department, getting routed through central accounting for classification and accounting treatment.
- Organizational changes necessary for ASC 842: Due to ASC 842, organizations may need to change lease inventory processes, as equipment leases may not be documented. In addition, companies may require additional technology investments to manage documents, critical dates, net present value calculations, schedules and disclosures. The new guidance creates an increased need for detailed documentation of leases, and many organizations lack the required technical accounting knowledge.
- Timeline and personnel capacity: As the deadline approaches, many companies face an uphill battle to perform lease inventory and abstraction, and develop staff training on FASB changes. Furthermore, companies must create a software implementation and training plan, as well as strategies for data migration and ongoing lease management.
Reasons to outsource
Considering the challenges above, leveraging lease accounting outsourcing has become an increasingly attractive option to middle market companies. Outsourcing enables companies to successfully adopt ASC 842 without the need to hire, develop and manage internal personnel and implement in-house technology applications.
To counteract the typical difficulties internal middle market accounting departments face, outsourcing the lease accounting function can provide the following key benefits:
- Instant compliance: An outsourcing provider can generate all FASB schedules and disclosures on a monthly basis with experienced lease accountants validating all calculations, exports and reports. These individuals are full-time lease accountants that can apply their knowledge of ASC 842 and IFRS 16 on an as-needed basis for clients that decide to outsource.
- Centralized lease management: Outsourcing creates a streamlined lease accounting function, with consolidated document management, lease abstraction, lease classification and mapping, and critical date monitoring processes.
- Integrated technology platforms: An outsourcing partner can implement a proven lease accounting technology solution that directly aligns with your needs. Instead of the need to purchase full technology applications and systems, software fees are included in a fixed, monthly price and only limited software training is necessary for end users. Rapid implementation of necessary technology is typically available through lease accounting outsourcing.
Rather than implementing, maintaining and supporting a lease accounting system in-house, the outsourced lease accountants act as the system’s super users. The headache of initial and ongoing system training is outsourced to the lease accountants, who are already trained and proficient in data entry, navigation and report development. The life cycle of implementing the software is also shortened by leveraging best practices and standard reports available within the outsourcing platform.
- A scalable solution and predictable pricing: Without the proper insight and experience, ASC 842 implementation can result in cost overruns and a lack of flexibility for future growth. Outsourcing provides a fixed-fee onboarding implementation with a consistent monthly price.
As time passes, business are coming to grips with the level of effort required to adopt the new lease standard. As that understanding deepens, the time to implement is shortening. By choosing to outsource the lease accounting function, you can bypass the software selection cycle, reduce internal training requirements and eliminate the need to hire specific resources to comply with the new standard.
Regardless of whether the implementation and ongoing accounting is done in-house or through an outsourced provider, there is no reason to wait. Software selection, implementation, lease abstraction, and end-user training should start today.