How technology can ease the shift to new lease accounting standards
The Financial Accounting Standards Board’s recent Accounting Standards Codification 842 (ASC 842) has brought significant changes to how leases are accounted for and presented on financial statements. The new standard was effective for public companies in January 2019, and the effective date of Jan. 1, 2020, is approaching quickly for private companies. Fortunately, many lease accounting software solutions can ease the transition to the new standard and help create an efficient, complaint reporting environment.
With the new ASC 842 standard, software solutions are often necessary to accommodate new payment and accounting processes that go beyond the capabilities of traditional, spreadsheet-based reporting. Below, we analyze how to utilize lease accounting technology platforms to successfully achieve ASC 842 compliance.
Gathering data is a prerequisite for any lease administration project. However, collection of this information goes beyond physical capture and centralization of leases and lease amendments, and should involve automated platforms to increase accuracy and efficiency.
To prepare for the implementation of a lease technology solution, organizations must do three things:
- Develop a full list of their lease portfolio
- Centralize and organize their leases in a digital format that facilitates abstraction, and then upload that information into a technology solution
- Understand and document their future-state business requirements and processes for leases administration
This process can be painstaking and cumbersome for many companies, but it is the most crucial requirement for successful adoption of the technology solution and, by association, compliance to the ASC 842 standard.
The first consideration organizations should understand is how leases have fit into their business strategy in the past. For some, they may have been a critical component of the business, and for others, an afterthought. Asking the question of how leases are treated is the first step of understanding how many leases may be in the organization’s portfolio and where to begin the search.
However, before a project team should begin to request lease documentation, it should first develop a strategy for organizing these documents in a manner that aids abstraction and import of the lease data. Lease technology solutions have different requirements for how data should be structured in a system, which means that not properly tagging documents with easy-to-navigate files paths and naming conventions could lead to delays or inefficiencies in the data import process.
At the bare minimum, the organization of leases should mirror the structure of the company. This process makes navigating the lease portfolio possible. Once the project team has determined how its leases will be organized, the request for information can be passed through the organization with proper instructions about how to deliver the information.
As information is collected, project teams should continue the process of understanding how leases are currently administered in the system. While each lease technology solution is unique, the specific process flows and controls within the organization are captured in a technology solution, regardless of which one is chosen.
Understanding business processes and reporting requirements involves a number of teams within an organization, including IT, accounting, finance, operations and leadership. Regardless of how a company administers its leases, processes should be compiled and documented as part of the information gathering process. Developing this information will improve the adoption and use of the technology solution in the future.
Depending on how a company’s business strategy utilizes leases, some organizations may be better equipped to manage the ASC 842 standard than others. The difference in how leases are managed can affect the timeline and effort required to fulfill the necessary obligations to fully understand and organize the lease portfolio. Understanding where a company sits on that readiness spectrum will define how soon it should be thinking about adoption.
For companies that have a mature lease administration business function, this step in the process may be more of a compliance measure than an actual project. For companies without a formalized approach, gathering the information necessary for ASC 842 adoption will be much more significant and time-consuming.
Design and configuration
When it comes to building out a lease technology platform, it is no different than configuring other systems companies are already familiar with, such as enterprise resource planning (ERP), corporate performance management (CPM) or customer relationship management (CRM) solutions. Each platform has its own complexities, nuances, capabilities, interface and learning curves that have to be considered. What makes the emergence of lease technology different and ever-so-complex is the updated lease accounting standards of ASC 842.
Each lease platform handles ASC 842 slightly differently, but they all ultimately allow the business to become compliant with the new standard, as well as streamline current lease processes. Complying with the new standard is strictly dependent on each individual’s specific business requirements. This is where the majority of the configuration is built. Building the platform to conform to specific business needs, processes, new accounting policies and lease administration tasks is of the utmost importance to holistically comply with ASC 842.
While going through this design and configure phase, the business may run into problems it never would have considered under the old leasing standard. This is where complete collaboration between technology and technical accounting teams is a must—this also applies to moving data in and out of the system.
The bulk of companies have most, if not all, of their lease data captured within Microsoft Excel spreadsheets. If this is the case, this can be a great first step in moving data into lease platforms, as most leasing solutions have built a robust importing tool for this purpose. If not, strong collaboration must occur again between the technology, technical accounting and abstraction teams. They must properly teach the users how to enter the correct data within the system, while making sure all the necessary accounting information is being captured.
Testing and training
Software testing of a new lease technology platform is a crucial part of the implementation process. By executing testing at the onset, quality assurance is given to the users of the system. Furthermore, it is important to identify errors and bugs discovered during the development phase of the project in order to ensure effective performance of the system.
Prior to testing, the project team should gather a list of test case scenarios that are standard to the system, as well as specific to the company, in order to ensure that the system will satisfy the business’s needs. These test cases should cover the technology platform as a whole, from unit testing, to end-to-end functionality testing, to integration and report testing, as well as security testing. Spending time testing all aspects of the system will verify correctness and quality of the performance.
In addition to testing, it is critical to perform a review and validation process for the data input into the system. Validation will ensure that accurate and useful data has been input from source to target. Data validation can be handled in a variety of ways, whether the entire population is validated or a sample of the population. In most lease technology platforms, reports or queries are provided to assist with and ease the validation process.
Once the lease technology platform is designed and configured, training should be executed. There are a variety of training curricula that may be followed. For instance, train-the-trainer is an efficient strategy which provides functional training to the subject matter experts, or super users, to prepare them on how to train the end users in the day-to-day use of the system. End-user training is performed for all system users, conducted by the subject matter experts with support of the software vendor, on the day-to-day use of the system.
In addition to training sessions, users should be provided with training manuals to guide them through the various functionalities of the system. The purpose of training is to ensure the users are comfortable with executing their day-to-day processes.
Reporting and reconciliation
As with any new accounting standard, ASC 842 comes with a slew of new disclosures, accounts and information to be reported on. Making sure the business is properly putting out accurate figures on the correct accounts comes from the guidance of the technical accounting team. Once the technical accounting team members know the capabilities of the lease platform the business has selected, they can work with the internal technology team to build out all necessary disclosures, reports, accounts, journal entries, etc.
This step is when custom reports required by the business are also built. Many platforms have standard reports already built in, but if a certain metric is missing that the business would like to track, it is up to the technology team to fill that gap. Any additional logic required can often be built, providing the business with a comfortable user experience.
Reporting is also where cross-system integrations may take place. This includes integrating the lease platforms to a business’s ERP for journal entries and accounts payable exports and imports. System integration is a very time consuming, complex project on its own and requires tremendous effort between the technology team and the business’s IT team to make sure all meeting points are correct. This includes any translation mapping, file specifications, import and export process, and any other IT requirements that must be met.
Ongoing system management
Consistent with any new business application, once the system is up and running the next step is keeping this system running smoothly and up to date. This is primarily accomplished via a thorough initial system training regimen, while also designating super users to keep an eye on system diagnostics. These super users should be in charge of administrative responsibilities such as following security protocols, creating new users, properly assigning user access and monitoring data integrity.
If the business does not have the bandwidth or internal knowledge to take on this type of responsibility or just does not want to worry about it, some qualified third parties provide lease accounting outsourcing solutions to take the administrative burden off the company by managing the lease portfolio. An effective outsourcing provider can deliver several key benefits, including proper reporting, abstraction and any system support.
If the business does decide to take on the responsibility of system maintenance and management, all lease technology platforms have a robust help desk support system in place to make sure all needs are met. In addition, the company can simply reach out to a member of the technology team to provide any necessary troubleshooting.
ASC 842 has resulted in a major shift to accounting policies and procedures for leases, and proper technology utilization is a key element to maintain compliance. Many technology solutions can reduce the complexity of implementing the new standard, but organizations should act sooner rather than later to allow enough time to choose and adopt an effective platform. The right solution combined with comprehensive training and ongoing management from internal or qualified outsourced resources can provide a more accurate and complete representation of your lease activity.