When you’re navigating a territory you’ve never been to, it’s nice to have a roadmap. That’s never been more true when it comes to navigating a FASB 842 implementation.
We’ve talked about the common mistakes, the hurdles public companies faced with implementation in 2018, and the most costly misconceptions you probably haven’t considered. We’ve even covered the questions you should be asking as you vet vendors.
But what we haven’t covered is just how to take the first step down the road to complete execution.
It’s a struggle everyone has and we know you’re going to face in 2019.
With that in mind, we put together this step-by-step process and roadmap you’ll need to follow to implement your FASB 842 project plan.
1 - Assemble the Project Plan and Team
A smooth transition will require a cross-functional team working together to cover all aspects of compliance.
The corporate finance and real estate teams will ultimately do much of the heavy lifting when it comes to preparing for and complying with the new FASB standards in 2019; however, it’s an effort spanning multiple departments and functions.
The IT staff will often be involved in the process to implement controls over relevant lease data needed to comply with the new standards. They’ll also handle controls related to judgments, estimates, and management reviews.
Procurement and facilities teams will also be involved.
This is because non-real estate leases such as office and manufacturing equipment will be included in the new calculations.
Investor relations, PR, and legal professionals will also need to be informed about the impact of the new lease accounting standards on the balance sheet.
HR needs to be involved, too.
Your company may need to ramp up staffing or redeploy existing personnel to meet project deadlines. Executive compensation tied to financial performance may also need additional review and potential revision.
2 - Develop a Project Budget
Most organizations will need to make additional technology, services and/or human resources investments in order to comply with FASB 842 or IFRS 16.
A key component of compliance will involve IT spending.
The vast majority (92 percent) of respondents from The Great Accounting Challenge: KPMG’s 2016 Accounting Change Survey believe they’ll need to upgrade their IT systems or invest in new technology because of the lease accounting guidelines.
In addition, 77 percent say technology represents the most challenging part of compliance.
In addition to the technology, you’ll need to budget for implementation, training, and post-installation follow-up.
3 - Get Prepared
Many organizations have a management system of some sort for real estate leases. But equipment and other lease contracts may be scattered throughout the organization.
The first step to compliance is identifying every lease and assessing the accuracy of lease data in existing systems.
There’s a wide range of data needed from any lease agreement in force for 12 months or longer in order to make the correct classification and complete the calculations. Some information isn’t commonly abstracted into lease accounting systems today.
So organizations will need to determine if internal resources or a professional services partner will take on this abstraction.
4 - Choose the Right Technology
In most cases, existing technology won’t be sufficient to support the new standards.
Some companies will need an entirely new lease administration solution, while others will need to purchase additional software from current vendors. In either case, the decision should be made early in the process (think now) so data acquisition and implementation can begin quickly.
You’ll want to evaluate criteria that includes feature functionality, price and support services.
5 - Evaluate Lease Negotiation and Approval Practices
Certain lease terms may be better for organizations under the new standards.
For example, some leases include service rent, which doesn’t have to be included in the capitalization schedule, but don’t say exactly how much of the gross rent is service rent.
Leasing teams may want to request more clearly defined lease terms in the future and may even want to renegotiate existing agreements.
The practice of leasing will receive greater attention and audit review, so approval requirements and internal audit plans may need to be revised.
6 - Implement, Integrate and Test Solutions
Once vendor selection and lease judgements have been made, solution implementation and integration should be in full swing.
Companies should expect for this process to take 60 or more days depending on support terms and team availability.
Once data is loaded and systems are integrated, you’ll likely want to test the systems for 2 full cycles.
Conclusion: Think Beyond Compliance
Smart finance and real estate professionals see the new standards as a strategic opportunity to optimize lease accounting and finance practices.
Centralizing lease agreements provides the opportunity to use the consolidated lease data, improve capital project management, streamline operational maintenance, and optimize space planning, financial reporting and other areas.
This is the perfect time to revisit your organization’s overall approach to lease management and financial reporting.
FASB 842 Prep Will Take 6 Months At Least. Here’s Why.
The timeline for FASB ASC 842 deployment has been largely underestimated.
It will take 6 months, for even the most prepared companies.
Here are some challenges you’ll encounter in 2019:
- Location of all leases
- No standard lease terms – especially for equipment
- Lease abstraction and review
- Resource constraints
- Cross department approvals
- New accounting and financial reports
- Final testing period
The 2019 Complete Guide to FASB ASC 842 Implementation Challenges will help you navigate the process with the least amount of time, expense and disruption.
Download the guide today.