Managing implementation of ASC 842 for international lease portfolios
For calendar year-end public business entities, the adoption date of Jan. 1, 2019 for ASC 842, Leases, is only a few months away. Given the complexities and fundamental changes of lease accounting under ASC 842, the effects will likely be significant for all entities. For many companies adopting ASC 842, data quality and decentralization of lease data can present challenges. The required disclosures under the new lease standard are significantly greater than historical disclosures and will require significant additional analysis and documentation to ensure completeness and accuracy.
For global companies, the implementation process may be even more challenging due to required comprehensive completeness and data quality evaluation. In addition, leases may be in multiple languages and multiple currencies that could further complicate the evaluation. Controls and validation of calculations will depend on the choices companies make as they gather disparate data.
In addition to changes in the leasing standard under U.S. GAAP, U.S. companies with international operations are also faced with changes in the leasing standard under International Financial Reporting Standards (IFRS). Companies will need to determine if they have any entities that must report under IFRS, and if so, they will need to ensure that they are addressing the changes under the new lease standard (IFRS 16).
Incorporating U.S. GAAP, IFRS and local GAAP differences
Although ASC 842 and IFRS 16 are similar, there are some significant differences that require different decisions and lead to different outcomes for companies reporting under both standards. Many systems in the market allow companies to account for lease transactions under both U.S. GAAP and IFRS. It falls to the company, however, to ensure they have selected the accounting elections and practical expedients that are available under both U.S. GAAP and IFRS standards and that this is configured in the technology.
In addition, companies would need to consider what the impact of the changes to U.S. GAAP and IFRS has on international operations reporting under local GAAP. This means:
- Assessing whether their international operations have statutory reporting requirements under IFRS and local GAAP, and also assess if the local GAAP leasing standard was changed
- Determining the differences between the local GAAP, U.S. GAAP and IFRS, as well as developing processes and controls to ensure that the different standards are being properly addressed
These companies may need to develop a manual approach to account for the local GAAP adjustments or work with their vendor to determine workarounds for the systems (note, the systems in the market should be able to assist companies with the reconciliation between U.S GAAP and IFRS).
Because the implementation of the new leasing standard will affect almost every department within an organization, it is important that management include all stakeholders in the discussions relating to the implementation of the new leasing standard. International operations will need to be involved in the transition plan from the beginning, as they may be required to assist with:
- Documenting the current state lease operational processes in their markets
- Developing the future state lease operational processes
- Making decisions regarding IFRS and local GAAP impact (if applicable)
- Identifying and locating the leases, including other contracts that may contain or represent leases, in their markets
- Reading and abstracting the foreign leases in their markets
- Managing leases being entered into the technology systems in their markets
- Reviewing and signing off on abstracted data
Managing the abstraction
Whether a company plans to use consultants to perform the abstraction or handle it in house, global resources will be required to handle this task. Here are some important issues to consider:
Companies will need to decide whether the abstracted data should be translated to English. By translating into the native language of corporate headquarters, management will be able to control the accounting inputs into the system, thus ensuring decisions made are appropriately implemented. This will also enable management to limit access to the lease technology system.
On the other hand, important accounting information may be lost in translation, especially if translators lack the knowledge of or expertise in accounting lease standards. In addition, there is a risk that what has been entered at headquarters will not be filtered down to the individual ledgers of the organization. As local accounting groups will not be in charge of the leasing entries, they will not be able to answer questions relating to these entries as they arise.
To address the potential issues, companies should consider setting up a shared service group or a center of excellence and ensure that they include representatives from their international organizations.
Companies with cross-border operations will need to consider the impact of foreign currency exchange differences, especially for leases not in an entity’s functional currency. For example, the lease liability represents a monetary liability that is translated at current exchange rates, whereas the right-of-use asset is a non-monetary asset translated at the historical exchange rate as of the lease commencement.
Management will need to determine if the lease technology system will be able to handle intercompany, cross-border transactions. Companies will need to have processes in place to identify the correct currencies to use and ensure that the lease technology system can provide information both in functional currency and reporting currency.
Lease technology systems
Global entities will need to ensure that the selected lease technology system will be able to handle all of the accounting and reporting requirements for both its domestic and international leases. In addition, there are critical decisions regarding lease technology systems that will need to be considered:
- Management will need to decide if corporate headquarters will have the only access to the system or if international operations will have their own access as well.
- An integration plan for the lease technology system and the entity’s ERP systems will need to be developed.
- Companies will need to consider whether the international businesses are on the same chart of accounts as corporate and if these chart of accounts will be mapped to the lease technology system.
- Management will need to evaluate how journal entries from the lease technology system will be accumulated and recorded in the entity’s general ledger
- In addition, management will need to consider both process and IT controls required to manage the entity’s internal control requirements.
Given the complexities and challenges noted above, entities may need to engage outside support to ensure effective and timely implementation of the new lease accounting standards.