Depending on the complexity and volume of your leases, implementing Accounting Standards Codification (ASC) 842 will likely require leveraging a lease accounting software package. Like most software implementation projects, this process requires involvement from individuals across the organization. In addition to employee involvement, outside vendors and integration partners may play a significant role in your implementation.
The following five topics are key areas for you to consider as you implement an ASC 842 software solution:
1. Software selection
The number of software packages that handle (or attempt to handle) lease accounting under ASC 842 standards is increasing each day. Although it may be easy to find a list of software provider names, it can be more difficult to find out the truth behind the functionality of each package.
A Google search will quickly drive you to a software company’s website where you can read some marketing material and software highlights. However, this marketing material is unlikely to point out customer complaints and trouble areas within the system.
A more in-depth approach includes hiring an outside firm to perform a software selection project. This involves requirements definition, vendor scoring, software demo agenda development and assistance with drafting a request for proposal (RFP). While this type of project includes some upfront costs, it often saves money in the future by providing additional assurance that you purchase the correct software to fit your needs.
2. Project management
Implementation of a lease accounting software system should involve input from a variety of employees across the company. Individuals in procurement, accounts payable, asset management, accounting and finance should play a large role. Coordination of these resources and their work schedules requires a strong project manager.
Additionally, several tasks are dependent upon each other during the implementation process. For example, requirements must be documented, leases abstracted, software configured, reports tested and calculations verified. Coordination of multiple resources working on various, interdependent tasks can be a nightmare without a project manager.
3. Lease abstraction and data quality
Lease abstraction is the process of reading a lease and documenting the required data points. The nature, frequency, amount and duration of lease payments can drastically change ASC 842 calculations. Options to extend, renew or terminate a lease are important to capture, as the likelihood of exercising those options changes the financial statements. Service contracts that contain provisions related to exclusive use of an identified asset may qualify as a lease under the new rules, regardless of whether a company actually considers the transaction a “lease.”
Quality lease abstraction may be the most important and most tedious part of ASC 842 adoption. In addition to the analysis of leases, you need to capture the abstracted data in the right system. Ideally, this system is a fully configured lease accounting platform. If abstracting data into spreadsheets, data integrity becomes a concern, as the data is not entered into validated drop-down lists in a database. Plan for an average of two to six hours of abstraction per lease, and increase that number for foreign language leases.
4. End-user training and user acceptance testing
The lease accounting software is only as good as the data entered in the system, which is a function of the users who have access to the system. Terminology used on fields, menu options and dashboard links in a lease accounting system may be different than what enterprise resource planning (ERP) and customer relationship management (CRM) users are accustomed to. Therefore, detailed end-user training is important, as the level of user adoption will drive the overall satisfaction with the project as a whole.
Lack of effective training often ends up frustrating users, pushing them to keep track of information in external systems. This not only leads to data privacy concerns, but could cause an accounting issue if a key lease is overlooked or misstated in the system.
Once users are trained on how to navigate through the system, they need to gain confidence in the calculations generated by the lease accounting software. Users must be sure to document their roles, responsibilities and new processes by creating test scripts. After test scripts are developed, real data can be tested in a quality assurance (QA) environment, so users can see the report effects of the data they input. In addition to validating system-driven calculations, user acceptance testing continues to build familiarity with the system.
Similar to a fixed asset management system, a lease accounting software solution serves as a separate subledger that supports balances presented on the financial statements. As such, the calculations made by the lease accounting software are represented in the form of journal entries which must find their way to the ERP system. This transmission can be done in a variety of ways, with the most automated involving a direct integration between the two systems.
Be sure to assess integration capabilities during your software selection (see 1 above) to make sure that your options are not limited. Companies that do not have application development departments in-house may need to contract the work to the software provider or a third-party integrator. In addition to integrating journal entries, many systems handle the payables and receivables associated with leases. The broader the scope of the modules implemented, the more important a tight integration becomes.
ASC 842 represents a revolutionary change in lease accounting for companies of all sizes, and several software solutions can ease the transition and help ensure accuracy. Closely evaluating these five key areas can help your organization choose and implement a lease accounting software platform that aligns with the new standard and your specific business needs.