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The Evolution Of Transparency In Accounting, And How It Affects Lease Accounting Standards

The evolution of transparency in accounting, and how it affects lease accounting standards

The latest requirements for lease accounting compliance, namely the ASC 842 and IFRS 16 lease accounting standards, are an effort to increase transparency into a company’s financial health.  The new guidance is intended to close loopholes that allowed operating leases to remain off the balance sheet, and is estimated to result in trillions of dollars’ worth of leases moved from the footnotes to the balance sheet. Compliance initiatives are no small feat, as public companies scrambled to meet the year-end 2018 deadline, and now privately-owned companies are rushing to meet the year-end 2019 deadline. Company-wide compliance efforts entail a comprehensive look at lease accounting in every department, and changing fundamentals on how lease data is managed.

But how did it get to this point? Here’s a brief overview of the evolution of lease accounting standards.

Overcoming the lack of transparency

The quest for greater transparency spans well beyond lease accounting. Over the past two decades, the U.S. Congress, the SEC and FASB have introduced a number of regulations designed to reduce potential fraud. In 2002, former president Bush signed the Sarbanes-Oxley Act into law as part of the effort to improve the accuracy and reliability of corporate disclosures. It accomplishes this by increasing accountability for directors and officers, auditors and legal counsel, amongst other tactics.

A more recent change in requirements is FASB and IASB’s changes to revenue recognition. Revenue recognition is a generally accepted accounting principle (GAAP) that specifies the conditions revenue is recognized or accounted for, and a more uniform framework for that process was issued via ASC 606. The new guidance made the framework uniform across industries in an effort to make revenue accounting more transparent and less fragmented.

ASC 842 and IFRS 16 are also designed to increase transparency, as before the new standard becomes effective, operating leases were “off-balance sheet” in the footnotes and excluded from financial ratios investors use to assess a company’s health, such as return on assets.  While each of these standards may seem monumental when a compliance deadline looms, there is support available. When fully-vetting potential compliance partners, ensure the software vendors offer benefits beyond basic compliance calculations.  See how CoStar’s lease accounting software offers comprehensive capabilities, including standard and ad hoc reporting and an accounting workflow and audit trail of all data changes.