A major change in lease accounting standards, effective as of January 1, 2019, has left many public companies scrambling to adjust their operating lease accounting practices. Operating leases include all leases related to business operations, including office space, factories, warehouses, ships, planes, and automobiles. In the past, operating leases were simply recorded as expenses in the financial statement. A lease would have been accounted for in a company’s balance sheet only if it could have turned into a future purchase of that leased asset. However, with ASC 842 and IFRS16 regulations coming into effect, companies are required to record all operating lease costs in their balance sheet, regardless of what options may exist at the end of the lease term.
The revised standards under US-GAAP (ASC 842) and International Financial Reporting Standards (IFRS 16) are poised to offer more transparency on a company’s financial picture to investors and stakeholders. This change will dramatically increase the amount of debt in corporate balance sheets and depict a more accurate picture of companies’ finances.
Companies impacted by these changes have work to be done. They must upgrade their business processes and introduce supporting technologies to comply with the refreshed standards. Finance departments will need to augment their ERP system with a dedicated lease accounting application to manage these new compliance processes. Here are some critical factors to consider when looking for a lease accounting platform:
Support for all compliance standards
The application should be able to collect, document, auto-update, and report all relevant data associated with lease accounting to stay compliant. With the new standards, if entries are not documented, they are considered non-existent which exposes the organization to consequences for non-compliance.
Automation
The application needs to provide the ability to automate and standardize the process of recording lease entries. This will eliminate redundancy and human-error while increasing process efficiency. With ASC 842 and IFRS16, accounting departments will need to regularly assess any changes in leasing terms and adjust the lease valuation. The new lease accounting system should be flexible enough to easily adopt to changes in leasing conditions.
Cross-departmental Data Collection
Lease account management requires internal departmental efforts; thus, the application should facilitate cross-departmental collection of all relevant data in a centralized repository. All lease-related requests and approvals must be documented in the system.
Multi-currency Compatibility
Acquisition of leases is not always restricted to local territories and can involve multi-currency transactions. The software should be capable of handling entities with multiple currencies when evaluating leases and their impact on the GL.
Strong Reporting Capability
Users are required to generate and document disclosure reports to comply with the new regulations. An out-of-the-box solution with template-based reporting can produce some standard reports. But, to ensure full compliance, users must consider a solution with robust reporting capability to produce not only standard reports but also any additional, customized reports required to manage an organization’s leases.
Quick Implementation & Ease of Use
The application should be quick to implement and easy to use. This might seem obvious but can often be overlooked during the selection process. Complex compliance requirements should not warrant an equally complex system to use that takes ages to implement. Users must also investigate how flexible the solution is to accommodate their company-specific needs and evaluate the configurability of the system based on those unique requirements. Strong user adoption depends on ease-of-use and an implementation that adapts the chosen platform to the needs of each individual organization.
New Lease Accounting Standards are now in effect and they are here to stay! If you are struggling to manage your lease accounting practices with existing processes and applications, it is time for you to consider a solution that not only facilitates compliance with the new regulations but also makes your processes more efficient.
For more guidance on selecting ASC 842 or IFRS 16 lease accounting software, be sure to review this software checklist provided by our partner, CCH Tagetik: The Ultimate Lease Accounting Software Checklist. With their comprehensive functionality checklist, you’ll know exactly what lease accounting features to look for in order to more easily achieve and maintain compliance with these new standards.