New lease accounting rules have been finalized and companies are planning their path to implementation. Find out why project management, software and data are critical to successful adoption.
On the heels (or in the midst) of implementing the new revenue recognition rules, companies are already planning for the adoption of ASC 842 and IFRS 16, the new lease accounting standards issued by the FASB and IASB last year which will bring nearly all leases on the balance sheet, with comparative presentation for prior years. This is a big change for companies and a whole new mindset that will likely drive changes in processes, controls, systems, and even fundamental business decisions. The following three elements are critical in ensuring your adoption is successful.
1. Project management
Although the required adoption date for public companies is 2019, and U.S. private companies have an additional year, the timeline is still tight. Companies should aim to complete their implementation about six months prior to the required date to allow adequate testing of new systems and processes and prevent any changes to controls in the fourth quarter. That means most public companies should plan to go-live with new systems and processes by July 1, 2018, approximately 12 months from now. Given some implementations will take 12 months, adhering to a strict timeline is imperative to keeping the project on track. Dedicated project management is a best practice, to follow a well thought-out and comprehensive plan, coordinating multiple departments and leading them through the implementation phases.
2. The right system
While you might be able to pound a nail with a screwdriver, it’s much easier and safer with a hammer. Knowing what you’re trying to accomplish and understanding your requirements will lead you to the right system for your company based on your specific needs. There are many software solutions on the market today, with well-respected names like LeaseAccelerator and CoStar, for example, all of which come with different functionalities. When defining your requirements, consider whether you’re a lessor or lessee (or both), necessary languages, allocation of your portfolio between real estate and equipment, unit of account, ASC842 and/or IFRS16 compliance, life cycle management or purely accounting functionality, integration with existing systems, size of portfolio and cost, and vendor reputation and stability.
3. Quality data
In the past, most leases have been “off-balance sheet” with the only insight for the reader of financial statements being amounts disclosed in Management’s Discussion and Analysis (MD&A) along with the Operating Lease Commitment footnote table. Typically companies have focused on managing and tracking larger value assets, such as real estate. Equipment leases, which are generally shorter term and lower value, have been procured by and managed within the business units to allow the businesses to remain agile without cumbersome approval processes. The tracking of such operating leases has been a low priority, given the low risk of material financial statement misstatement. After all, the expense would eventually show up somewhere. With the new rules, having complete transparency into the details of existing leases is imperative to achieve accurate financial reporting.
Of course, obtaining that quality data and keeping it current requires an initial data finding and cleansing exercise, with rigorous processes and controls to ensure the data remains pristine. Since some companies have thousands of operating leases (including leases embedded in service and supply contracts), this project could take a while. Utilizing artificial intelligence through data scanning software can help minimize the time required to extract the relevant data to input into your selected software solution, as well as ensuring you are adequately staffed with appropriately trained resources.
There’s no doubt the path to compliance for lease accounting is more tactical than technical. While there are some differences in the accounting for leases, such as what qualifies as a lease and calculation of lease payments, the technical interpretation of the standards is not likely to be the most challenging aspect of implementation. Ensuring you have strong project management to keep your plan on-track, the right software for your company’s specific lease portfolio needs, and quality data are three of the most important aspects to ensure you meet your compliance deadline.
Shauna Watson, RGP’s Global Managing Director of Finance & Accounting, leads the lease accounting and revenue recognition initiatives. Her experience includes leadership positions in technical accounting at a leasing company and a Fortune 100 aerospace & defense company, along with 11+ years in public accounting.