Accounting EZLease

6 Steps to Lease Accounting Compliance

Sponsored by EZLease

A snapshot of the “what, who, where, and how” of finding and loading leases that you can use to get the new lease accounting right.

© EZLease

We are more than halfway through 2021 and the lease accounting deadlines for private and government organizations will be here in no time! If you’re in one of those groups, you’re probably wondering how you’re going to add yet another project to your team’s workload in the second half of this year. The good news is that, with the right plan, you can do it. Successful lease accounting projects start with a solid approach for finding the data and then use a step-by-step plan to get compliant, reducing stress on teams. In this article, we give you a snapshot of the “what, who, where, and how” of finding and loading leases as well as six steps you can use to get the new lease accounting right.

The ‘why’ and the ‘when’ – the deadlines

The ‘why’ is already clear – the new lease accounting standards set up by the Federal Accounting Standards Board (FASB), International Accounting Standards Board (IASB) and Governmental Accounting Standards Board (GASB) are driving most organizations to change how they manage and report on lease obligations. The ‘when’ is different depending on the group you’re in – private companies have an early 2022 deadline and government departments have until their fiscal 2022 to get compliant:

  • For government organizations, the GASB 87 deadline is for fiscal years beginning after June 15, 2021.
  • For private companies, the ASC 842 deadline applies to years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

When public companies went through their compliance process around three years ago, they underestimated the time it would take to find, analyze, and load their leases (and also quickly realized that, even for a few leases, a spreadsheet isn’t the best answer... more on that later). Even though it feels like your workload might not allow it, starting earlier helps drive down the risk of missing the deadline and will take the pressure off you and your team.

The ‘what’ – your lease data

To get compliant, you’ll need to capture a broad set of data about your leases. Get ready to dig through your master lease agreements for details like lease term, Incremental Borrowing Rate (IBR), economic life, residual value, payments, and foreign exchange rate. You may have other details you want to track for your organization. If you have a lot of leases, it can be helpful to work with an abstraction vendor who can extract the lease data you need at scale.

The ’where’ and the ‘who’ – lease sources

Leases can be stored in a variety of back-office systems – or worse: on random spreadsheets hidden in scattered departments. To make sure you’ve collected all the leases you need to track for compliance, it’s important to cast a wide net. 

Target likely departments who may have lease contracts. Start with contracts/legal, accounts payable, business unit leaders, real estate, IT, procurement and treasury. Look for recurring payments and rentals which may indicate a lease. Lease stakeholders and owners can be distributed across an organization so think broadly. It’s common to discover more leases than you thought you had in this process.

The ‘how’ – six steps to get compliant

Use these six steps to lay out a clear and simple project plan to make your compliance project easier:

  1. Staff team. Make sure you have the right team in place – the project can be led by one person or shared across a few people. In a recent global lease accounting survey, 27% of respondents said they manage lease accounting with 1-2 people. Be prepared for some turnover on the team by choosing a software vendor that offers ongoing education.
  2. Confirm required data. Some of the common data elements are noted above in the “what” section above, but your organization or the software you choose may dictate unique requirements.
  3. Find leases. Put on your detective hat and dig around to find your lease agreements. Reach out to the “who” list to identify stakeholders and business owners who have leases and lease contracts.
  4. Abstract lease data. Pull out the lease data you need, either on your own or with a provider who does abstraction.
  5. Attest data. Review and verify the data to make sure it’s complete and accurate.
  6. Load data. Look for software that allows you to do bulk import on your own, both for the initial load and for changes down the road.

If lease accounting is new to you, use accounting examples like these to show you what is changing with the latest standards. Overall, the lease accounting standards generally agree on the top-level definitions, such as what constitutes a lease, how to determine the term and lease vs. non-lease components. The key difference between FASB and GASB/IASB is that with GASB/IASB all leases are considered finance leases.

Achieving long-term compliance

The lease accounting standards aren’t going away. They may change, and your data most certainly will, which means you need to have a long-term compliance plan. How will you manage lease changes? How will you add new leases? Will you centralize lease vs. buy decision-making? This isn’t a one-time project – make sure you have resources who understand the standard and who can manage updates to your lease portfolio to stay compliant into the future. Although it’s common to start out using spreadsheets, remember that spreadsheets can’t check for accounting errors, provide the audit trail you’ll need, or generate journal entries and reports. Most organizations choose lease accounting software to keep up with changes.

Next steps

Use the six steps to build out your own project plan. Start gathering your leases and figuring out how you’ll manage the ongoing compliance requirements across your team. Look for software that makes it easy to upload and modify leases yourself and that helps you close your books faster with all the right disclosures. By using these steps, lease accounting can be fast and simple, and ready for the long-term.

As you continue to optimize your lease accounting processes, we invite you to try our free 15-day trial of EZLease. Please reach out if you have any questions or if you would like to meet with an EZLease expert to get started.