Share this
Lease Accounting Compliance – 3 Critical Steps for Success
by Matt Waters, CPA on June 8, 2018
As time runs out for public companies to report under the new ASC 842 and IFRS 16 lease accounting standards, CoStar defines a critical path for compliance success.
By Matt Waters, CPA and CoStar Lease Accounting Specialist and featured in Financial Executive International Daily News.
Time is quickly running out for public companies that have not achieved compliance with the new ASC 842 and IFRS 16 lease accounting guidance. After December 15, 2018, practically all real estate and equipment lease obligations must be added to the balance sheet as assets and liabilities for financial reporting.
After just recently complying with the challenging new requirements for revenue recognition, ASC 606, many accounting teams have not yet fully realized the extent of challenges that lie ahead for lease accounting compliance.
Becoming fully compliant with the new standards is a multi-step process. Companies must set new accounting policy, identify and collect lease data, select a solution for reporting and implement new processes to manage lease data going forward. The biggest challenge faced by most companies is the volume of organizational lease information, particularly with embedded leases that are hidden in contracts among various stakeholders and departments. Companies that already adopted the new standards ahead of schedule consistently report that more time is needed than anticipated when it comes to data collection and validation, as well as software configuration and implementation.
To effectively navigate the challenges associated with lease accounting compliance and meet the looming deadline, there are three critical steps every public company should take:
1) Reduce the project scope to focus only on required system functionality for compliance, minimum integrations and standard reporting
2) Find a partner to help with project management, policies, data and system implementation
3) Choose a proven lease accounting software product with a reputation for rapid deployment.
Reduce Project Scope
Research published by leading accounting firms reveals that many companies are behind on new lease accounting standard preparations. To meet the deadline, organizations should narrow their focus from complete lease management system overhauls and sweeping internal policy changes to simply making the specific calculations and processes needed for reporting. In other words, limit the project scope to only the minimum requirements.
While it may be tempting to make radical changes during the transition period, it is best to refrain from major system migrations or replacements at this point. Instead, consider a phased project approach. The first phase, due by the end of the fiscal year, involves connecting existing lease data to a basic lease accounting system with integrations for essential functionality. Later phases can include more extensive data migrations, integrations and reporting among other customization.
Vendors are already experiencing a strain on implementation resources as the deadline draws closer. A deliberate, methodical, “critical path” approach to adopt the essential software and functionality is now essential. Also, lengthy RFPs will further prolong the process, so contract the resources necessary as soon as possible to further reduce project scope.
Find a Partner
It’s important to partner with experienced accounting and software advisors for implementation. Supplementing existing staff with subject matter experts will help expedite accounting policy decisions and internal process mapping. An experienced team will also help close real estate and equipment lease data gaps by locating and abstracting key information, plus help with testing, documentation and a post-implementation audit.
An experienced team should also offer insight on efficiencies and best practices, such as migrating equipment leases in batches, which is more efficient than waiting for the entire population of lease data before loading into the new software.
Don’t delay when establishing a compliance transition team. It’s anticipated that even the “Big 4” accounting firms will exhaust their support resources as demand surges nearer the deadline.
Choose a Proven Software Provider
While the software provider selection process is unique to every company, it’s important to select a vendor that offers extensive experience with current lease accounting policy, ASC 840, and has proven success with reporting and data management accuracy. This is critical for reducing risk of audit issues after the compliance deadline.
At this point in time, simply having the technical functionality is not enough. Companies must select a provider with a strong track record of rapid deployment to meet compliance deadlines. It’s important to note that while some vendors offer capable software, they have a history of taking more than six months to fully implement their solution.
New lease accounting software should readily integrate with existing lease management and ERP systems. In the spirit of simplifying the critical path and eliminating unnecessary work, now is not the time to do a major system overhaul. Instead, connecting current system data to necessary lease accounting functionality comes first, saving “nice-to-have” features for a later date.
Companies should also perform through due diligence by sharing specific lease data requirements with potential vendors and asking them to test and prove functionality. Seeing firsthand how the application produces expected results with the company’s own data, instead of just trusting promised functionality, is an important step in the selection process.
While it’s important to simplify and focus on the critical path, software selection isn’t just about being compliant on the deadline. It is also about the reliability of managing leases on a go forward basis. During the process, keep an eye out for simple value-add features, such as software that gives users the ability to limit their manual work and create efficiencies in the new processes surrounding compliance.
As the deadline quickly approaches, the new ASC 842 and IFRS 16 lease accounting guidance can be daunting. However, by taking these three critical steps companies will ensure they are well-positioned for success.
Share this
- ASC 842 (78)
- Lease Accounting Software (62)
- Accounting Teams (39)
- Lease Administration Software (19)
- Retail Tenants (14)
- Commercial Real Estate (11)
- Lease Management (10)
- Market Data and Analytics (7)
- Real Estate Teams (6)
- ESG (5)
- Success Stories (5)
- News and Media Coverage (3)
- Transaction Management Software (2)
- Customer Success (1)
- Office Tenants (1)
- September 2024 (2)
- August 2024 (5)
- July 2024 (3)
- June 2024 (3)
- May 2024 (4)
- April 2024 (1)
- February 2024 (1)
- December 2023 (4)
- November 2023 (6)
- October 2023 (4)
- September 2023 (2)
- August 2023 (2)
- July 2023 (3)
- May 2023 (2)
- March 2023 (1)
- February 2023 (3)
- December 2022 (3)
- November 2022 (4)
- October 2022 (4)
- September 2022 (1)
- August 2022 (4)
- June 2022 (1)
- May 2022 (4)
- April 2022 (8)
- March 2022 (3)
- February 2022 (1)
- October 2021 (2)
- September 2021 (1)
- August 2021 (15)
- July 2021 (3)
- June 2021 (1)
- May 2021 (1)
- April 2021 (3)
- March 2021 (1)
- January 2021 (1)
- December 2020 (3)
- November 2020 (1)
- October 2020 (2)
- September 2020 (2)
- August 2020 (3)
- July 2020 (2)
- June 2020 (3)
- May 2020 (1)
- April 2020 (1)
- March 2020 (1)
- February 2020 (1)
- December 2019 (1)
- October 2019 (1)
- September 2019 (2)
- August 2019 (3)
- July 2019 (2)
- April 2019 (69)
- October 2018 (1)
- August 2018 (1)
- July 2018 (1)
- June 2018 (1)
- May 2018 (1)
- April 2018 (2)
- March 2018 (3)
- February 2018 (2)
- December 2017 (1)
- August 2017 (3)
- June 2017 (2)
- May 2017 (2)
- April 2017 (1)
- March 2017 (2)
- January 2017 (2)
- November 2016 (2)
- July 2016 (1)
- June 2016 (1)
- July 2015 (1)
- March 2015 (1)
- June 2014 (1)
- April 2014 (11)
- October 2011 (1)
You May Also Like
These Related Stories