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.