For most companies, adding real estate and equipment leases onto the balance sheet will be a sizable task. While each organization may face unique challenges for lease accounting compliance and ongoing lease accounting management, this guide provides a proven 12-step approach to success. As the industry leader in successful lease accounting software implementations, CoStar has valuable insight into lease accounting lessons learned for private companies.
Here is a quick breakdown of the twelve steps, for more comprehensive guide to lease accounting, download this PDF.
Step 1: Obtain a full understanding of ASC 842 and/or IFRS 16
Under the new guidelines, virtually all leases need to be recorded on the balance sheet – a complex task by any measure. There are many factors to consider, and companies should ensure the appropriate expertise is on hand. The subject matter expert (or team of assembled experts) needs to have an extensive understanding of the new standards and deep knowledge of company-specific lease data. Options include recruiting internal expertise to become an integral part of the project team (with the understanding it will take a significant amount of time), contracting an expert for the length of the project or consulting with an external third party that specializes in this field.
Step 2: Set a compliance timeline
The compliance deadline for private companies getting the most publicity is December 15, 2019. However, there are many factors to consider when determining a compliance timeline. For example, it may be beneficial to adopt the new guidance before the deadline, and some companies choose to adapt early to realize operational advantages, or to help prepare for a company sale or IPO, or because having more assets reported on the balance sheet is favorable when competing for contracts. In other words, when setting a compliance deadline, take a holistic view of the business operations and look for overall costs and benefits.
Step 3: Meet with a cross-functional group of leasing stakeholders
Because the new standard includes all leases, this initiative impacts a diverse group of stakeholders across the organization. Non-real estate leases can introduce tremendous complexity, as these leases are typically decentralized around the business – both geographically and throughout different departments. Because non-real estate leases are so decentralized, it’s essential to get representation, buy-in and involvement from various groups across the company. (download the comprehensive PDF guide for a list of leases typically managed by different departments)
Step 4: Organize a project team
A cross-functional core team with clearly established leaders need to be formed for a successful lease accounting compliance initiative. It makes sense for the accounting group to lead the initiative, although everyone on the team should be invested in the project’s success.
Step 5: Select a software solution for lease management and reporting
Some companies already manage real estate and non-real estate leases in a central repository, but few have a battle-tested software solution to track and report data for all eases. Compliance with the new standard means many companies will convert from a fragmented, manual approach to lease management to a software solution that can centralize and streamline lease administration and management. When shopping for lease accounting software, keep in mind that pricing can be structured differently. For example, many solutions targeting large enterprises have big overhead costs, and other solutions charge incrementally based on the number of users. A better pricing model focuses on the amount of lease data managed by the system, and provides an unlimited number of system users, so various stakeholders in departments throughout the company can access and manage lease data.
Step 6: Compile a list of all leases
Be prepared: this step may include the compilation of a huge volume of lease data, but it’s crucial to identify and transfer critical data points about almost every lease onto the balance sheet accurately. Don’t forget to look for leases embedded in larger contracts.
Step 7: Evaluate compliance with existing ASC 840 accounting standards
While moving through this process, keep in mind that preparing for new lease accounting rules may expose compliance issues with current requirements. Keep materiality in mind, understand the impact to practical expedients and review with auditors.
Step 8: Evaluate the HR impact and adjust staffing/training plans
There is no doubt, compliance with new lease accounting standards potentially represents a huge scope of work. In other words, employees cannot effectively handle a project of this magnitude “off the side of their desk,” and the additional workload needs to be acknowledged and addressed from an HR standpoint. Typical remedies include relieving employees from normal day-today responsibilities while they are temporarily assigned to work exclusively on lease accounting compliance, or commitment to hire additional outside resources.
Step 9: Set internal accounting policies around leasing
The new standard is more principles-based and requires more robust company policies and controls. When setting new policies, it’s important to discuss full ramifications with auditors.
Step 10: Evaluate the process flow for leases and adjust to ensure efficiency
Compliance with new standards represents an opportunity to add value to the company by streamlining processes, empowering better decision-making and realizing cost savings. By consolidating and organizing lease data, companies are better positioned to increase lease data reliability and efficiency, and can better negotiate with vendors.
Step 11: Review new processes, software, policies and pro-forma results with audits
Audit teams can provide valuable expertise for project success, and reviewing with audit associates early and often can produce time savings during the next annual audit.
Step 12: Set up a sustainable process for managing leasing data Throughout the process, give thoughtful attention on how the new process can be sustainable and provide long-term efficiencies. Be assured, there will be a return on the significant time and effort invested in this initiative. Successful lease accounting and management has potential to become very valuable for ongoing business operations – beyond accounting standard compliance – as existing leases are maintained and new leases are accumulated.