As the deadline quickly approaches for the new lease accounting standard ASC 842, scant 1 percent of companies have completed requirements necessary to meet the new requirements according to a recent PricewaterhouseCoopers survey. The deadline for public companies is December 15, 2018 and private companies are required to do the same one year later.
In addition, the PWC survey revealed 95 percent of public company respondents reported adopting the recent accounting changes was somewhat or very difficult. While there’s no doubt ASC 842 is a formidable journey, there are four steps proven to guide companies in the right direction.
Step 1: Get the Lay of the Land
Do a complete survey of your lease accounting landscape, identifying strongholds and weaknesses. Lay the groundwork for an efficient implementation by compiling a complete, detailed catalog of existing leases and business requirements. Any information gaps should be identified during the thorough lease review process of all real estate and non-real estate leases. According to the survey published by Pricewaterhouse, 60 percent of the companies reported difficulties identifying their lease population. Survey results showed many organizations need to collect and manage data from thousands of leases and related documents, such as amendments, schedules, and asset listings.
It’s also important to engage and educate all project stakeholders during this phase of the process. Cross-functional team to ensure departments across the company are represented, including real estate, maintenance, logistics, IT, Legal and Accounting. More than 70 percent of PWC survey respondents with public companies rated human capital/resource requirements as somewhat or very difficult, making it among the biggest challenges faced to achieve lease accounting compliance.
Step 2: Map a Clear Path
Once you’ve clearly identified your starting point, it’s time to plot your course. One major crossroads: Deciding whether to invest in a new software system. More than 50 percent of public companies and 25 percent of non-public companies expect significant software system changes while adapting to the new lease accounting standards, according to information published by PWC.
Leverage the knowledge of the cross-function team formed during Step 1, and gathering the requirements from all stakeholders. Ensure the evaluation process is thorough by developing a list of test scenarios that can be used to verify system functionality. Also, ensure the new software can readily integrate with existing ERP and IWMS systems.
Step 3: Look for Opportunities Along the Way
Organizations that look beyond the primary goal of meeting lease accounting compliance will be rewarded with opportunities to improve on business as usual. While evaluating software systems and processes, look for opportunities to improve standardization, centralization and automation. In addition to sweeping changes, look for opportunities to improve practical micro processes needed for day-to-day business, such as lease versus buy models.
Step 4: Charge Ahead
When Steps 1 through 3 are done with care, businesses have the confidence and know-how to focus on execution. While minor detours and roadblocks will present themselves along the way, businesses will be well-equipped to complete the journey to lease accounting compliance before the deadline.
Accountability and communication are also crucial for successful project implementation. All members of the project team should have clearly defined tasks and deadlines. During the testing and implementation stage, it’s crucial to keep an open line of communication amongst stakeholders and share all insights – both good and bad.
In sum, the clock is ticking for both public and private companies to add virtually all leases to the balance sheet. However, if done right, the benefits will reach far beyond accounting standards compliance and allow businesses to gain efficiencies in operations and providing visibility into spending patterns around leases, resulting in big savings. Ultimately, the keys to success include understanding and developing accounting policy and careful project planning.