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Compliance with the new lease accounting standards (FASB ASC 842 and IFRS 16) involves a lot of preparation. Many companies with large amounts of leases are choosing to use software providers, like Visual Lease, which offer solutions that help maintain accurate, reliable data.
To get your software up and running before the deadline, implementation is a necessary and important part of the process. Although, due to the new guidance, it’s common for companies to currently not have their data properly accounted for or organized, which in turn, creates roadblocks within implementation.
Luckily, for private companies who are racing to meet the deadlines, there is the added benefit of learning from global public companies who have already gone through the implementation process. Essentially, this means you can pivot to avoid the same missteps that they did, and experience overall smoother implementation. After implementing hundreds of global public companies last year, Visual Lease has identified 4 common pitfalls to avoid through this process:
1. Don’t underestimate the amount of time for preparation
Many public companies in 2018 underestimated the time and resources needed to get it done. A lot of teams assumed it would be simple to gather data, do a few calculations, and produce journal entries. However, the scale and scope of transitioning to FASB ASC 842 and/or IFRS 16 includes many more accounting complexities, logistical issues, and technical details than you may expect.
The best way to ensure you can be up and running to meet the compliance deadlines is to build a realistic timeline for your organization to follow. In doing so, it’s best to evaluate what could possibly delay your implementation, including other project timelines. It’s important to get started as early as possible, so you don’t have to worry about working around unexpected issues, and jeopardize meeting the compliance deadline.
2. Don’t exclude stakeholders from various departments
In our experience working with public companies, issues would arise when the client’s identified team did not include the proper personnel during implementation – or even when they would include too many people. Excluding crucial members of the team costs companies both time and money, having to go back and fix mistakes made without them.
Lease accounting software implementation should involve various stakeholders within your business. A strong, credible team of internal stakeholders can help ensure you are capturing the right data. To do this right, you at least need:
- An experienced project manager, who would be responsible for spearheading the effort. This person can be from your internal project management team, an outside consultant, or a representative from your acting advisory firm.
- Key representatives from other teams, such as those from Real Estate and others who manage your leases. Lease experts can make sure you’re collecting data that will be needed to perform calculations and journal entries.
3. Don’t stall on making accounting decisions
Lease accounting technology will help you streamline your data, simplifying how you perform required accounting and administration tasks, such as reporting. However, if you haven’t made accounting decisions yet, you might not be ready to choose the specifications and setup of your system and data.
Therefore, we recommend making accounting decisions while you are exploring lease accounting technology vendors – rather than once you’ve made your decision. This will help you be most efficient and optimize your time both during implementation and during the buying process. Some examples of these decisions include:
- Practical expedients: The practical expedients you elect to take have an impact on how your data needs to be structured and broken down.
- Discount rates: Frequently overlooked, some firms decide to use the same rate for all leases across the board, while others use a complex table of rates for different types of calculations.
4. Don’t forget to validate your data
The impact of lease data on your balance sheet is much greater under ASC 842 and IFRS 16. All leases must now have both an asset and a liability on the balance sheet. Once you’ve identified the lease data to capture, validate your data before you get to the stage of importing it.
Lease accounting software will produce mathematical calculations of your data, but if your data is wrong, the accuracy of your financial reports will be compromised – and you could end up violating a debt governance.
To confirm your data is accurate, we recommend developing models and testing your lease data to uncover any potentially missing items. Some good questions to ask yourself are:
- Are you sure you have a complete set of payment data from all leases?
- Are start and end dates accurate?
- Have you included lease amendments?
Are you ready to implement lease accounting software? Download our Lease Accounting Readiness Checklist to see if you’re prepared for the transition.