In 2016, the Financial and Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) introduced new guidance for lease accounting. The driving force behind the standard changes is to provide investors and users of financial statements with a more faithful representation of an organization’s lease obligations. These standard changes represent a major shift in the current accounting policies and procedures for lessees, and organizations need to prepare for this new standard from an accounting, operational and technology perspective.
In particular, this new standard calls for significant estimates and judgments which will require contracts that are considered leases under the new standard to recognize a Right of Use Asset and Lease Liability on the balance sheet. While many organizations currently manage their lease portfolio and associated lease accounting calculations in Excel spreadsheets, the new standard will make this method very difficult, as each lease may require several tabs to capture the payment and accounting schedules.
First, leasing from a lessee perspective is very unstandardized, with organizations entering into contracts from other organizations. This often results in limited uniformness and each lease may have different clauses, terms and options. These all can have an impact to the accounting and may change throughout the term of the lease.
In addition, organizations often enter into modifications to leases, which must be assessed as they occur and feed into the accounting schedules. Organizations also need to keep up with lease terms, renewals, options to purchase, options to extend and other specific situations that drive a need to evaluate the lease on a recurring basis.
Several technology solutions can help your organization automate the lease accounting process, and comply with new compliance demands. In particular, organizations that have more than 20 leases will benefit greatly from a technology solution, as the new standard will require significant effort to keep up with and maintain.
The timeline to adopt new lease accounting guidance is slowly coming to an end for public companies. However, private companies have additional time and can position themselves successfully to implement and adopt the new standard by getting a head start on their technology selection and implementation.
The technology solutions currently on the market are designed to support both Accounting Standards Codification 840 (ASC 840) and 842 (ASC 842) accounting. Therefore, organizations can select, implement and abstract all leases into their preferred technology platform over the course of the next year, and then make minor modifications to the technology configuration to transition from ASC 840 to ASC 842.
While organizations should consider many issues when implementing a lease accounting solution, lease abstraction is one of the biggest factors impacting the lease accounting timeline. With organizations needing a database to abstract leases, leveraging technology solutions to start the lease accounting process early under current accounting guidance is an effective strategy, developing a transition plan as deadlines approach and the accounting is further evaluated.
This approach eliminates the need to abstract into Excel and allows your organization to undergo a thoughtful lease abstraction process to abstract the fields not only necessary for accounting, but also for business management and reporting.
Technology platforms are a key element in a successful lease accounting strategy, introducing greater standardization and efficiency into the process. Choosing the right solution can help your organization ensure compliance with the new standard and provide a more accurate representation of your lease activity. However, with compliance deadlines approaching, you should start your software selection and implementation process now to ensure that you have adequate time to choose a platform that aligns with your organizational structure and compliance needs.