That’s the average portion of a portfolio equipment leases occupy at any given company, according to the Equipment Leasing Association of America.
However, many companies don’t know:
- How much equipment they’re leasing
- The terms associated with those leases
- Who’s providing the financing for those leases
- When those leases will come up for renewal
And that only adds fuel to the fire for the average 75% of companies who have reported facing challenges when trying to implement the new FASB 842 accounting standards.
One of the most significant changes these new accounting standards require is reporting equipment leases on the balance sheet. In the past, equipment leases were reported in the footnotes along with other leases. Now that’s not the case.
Unfortunately, information you have on equipment leases in current spreadsheets is most likely not thorough enough and may not encompass all of the leases you need to report.
Statistics say only 21% of companies are actually prepared to comply with the new accounting standard.
Companies in equipment-heavy industries, such as healthcare, construction, and transportation, probably have thousands of contracts to sift through in order to correctly comply, leaving many people feeling frustrated and overwhelmed.
Because the wrong data can lead to big problems, we’ve come up with 12 guidelines to walk you through each and every step of preparing your equipment leases for reporting.
Step 1: Gather equipment lease information
This process will likely be time consuming, and possibly a bit complicated. However, it’s also the necessary first step towards FASB 842 compliance.
Pull out any contracts that have or may have equipment leases tied to them. You may even want to hire legal experts to help you sort through contracts and note every piece of equipment lease information.
Data is the key to successful FASB 842 implementation, so you want to take all necessary steps to ensure it’s all correct and accounted for.
Step 2: Make a definitive list of equipment leases
Use the contracts you pulled in step one to make a definitive list of every single piece of equipment you’re leasing.
Be sure to include what the equipment is, how much it costs, terms of the contract, renewal options, and all payment history.
Step 3: Include lease composition
Once you’ve compiled your lists, include lease composition to further divide your equipment leases into manageable categories such as: airplane, ship, construction, and manufacturing.
This will help you see where all of your equipment leases are and give you the ability to access them quickly and easily.
Step 4: Double check for unexpected equipment leases
You may not initially think of these items as leased equipment, but they definitely are. Items such as speakers or satellite receivers used to play music at your store, and even copiers used to print contracts daily, can all be considered leased equipment.
Take some time to review this list to ensure you don’t miss valuable equipment leases you may not originally consider.
- Office Equipment
- High-Value Assets (e.g. railcars)
- Embedded Leases
- Service Agreements - all need to be evaluated for potential embedded equipment leases.
Step 5: Get everyone on the same page
Compiling data is the most tedious and time-consuming part of FASB 842 compliance. Don’t try to tackle it alone—get everyone involved.
Bring your entire team into completing this task. Delegate a lead in each area to thoroughly sift through their department’s contracts for equipment leases, including unexpected ones.
This should make the process go much faster.
Here’s a breakdown of how you may want to divide up responsibilities for each team:
- Human Resources - employment contracts
- Marketing - vehicle advertisements, brand ambassadorships
- Facility Maintenance - artwork, gym equipment
- Office Services - mail centers, copy operations, beverage service, office equipment
Congrats! You’ve finished the hardest part. Now that you’ve collected all of your raw data, it’s time to add the finishing touches.
Step 6: Put together a timeline & identify key lifecycle dates
FASB 842 requires you to report assets and liabilities for equipment leases with terms of more than 12 months. Comb through your list(s) from the previous step and find the leases that match this criteria.
This new organizational system you’re creating to manage your equipment leases also helps you identify and track important end-of-term dates for all of your leased equipment.
This has the potential to save you money in the long run.
By staying ahead of these dates, you’re able to proactively manage end-of-term decisions regarding returning, renewing, refreshing, or buying your equipment—in turn, giving you more control over the lease agreements, terms, and money you’re spending.
Step 7: Place a dollar amount on each lease
Make detailed notes about how much money each individual piece of equipment is costing you.
This includes not only the value of leased equipment assets, but also the parts inside of leased equipment, such as the cost of a forklift and the battery that fuels it.
Also, if you have lease components (the equipment itself) and non-lease components (e.g. taxes) written into a contract, separate them out to definitively show where your finances are going.
Keeping this data around, and easily accessible, makes it simpler to weigh your options regarding equipment leasing vs. financing or purchasing. It allows you to clearly see every dollar spent, which gives you the ability to change course if it makes more financial sense.
Step 8: Think about the implications of each equipment lease
Now that the above information is readily available to you, you can begin to analyze and evaluate the benefits and detriments of each lease being kept in your books.
Start evaluating whether the leased equipment provides enough ROI to make it a substantial asset, or if it would make more financial, legal, and business sense to purchase or sell. Create a standardized “lease versus buy” analysis tool to help you with each and every financial decision surrounding your equipment leases.
It’s a lot of work to compile all the information needed for compliance, but it’ll pay off in the future.
Now that you’re able to easily access and compare all of your leases and monetary data surrounding them, you have more control over the important decisions made regarding your equipment leases.
It’s time to begin digitizing that data.
Step 9: Check for software compliance
When evaluating which lease accounting software to use, make sure to carefully ensure it has the most up-to-date offerings and is compliant with FASB 842 standards.
This is imperative. Otherwise you’re wasting time and putting yourself and your company at risk.
You’ll want to make sure the software you plan on using is optimal for your company’s specific needs. In order to verify this is the case, consider completing a needs assessment to fully understand the scope of what you need from your lease accounting software.
Consider using a cloud-based software that often includes less deployment time and will automatically comply with new standards set in place in the future. It’s best to compare and contrast several different available solutions to be certain you find the best option for you and your company.
Step 10: Make sure you can access key reports
You’ll want to double check the software you choose provides reporting, and that it’s in depth enough to cover everything you’d need to know.
At the very least, you should receive or be able to view reports and analytics for the value and time of all your leases.
Step 11: Do a usability test
You’ll want to guarantee the software you choose is easy to use and fairly intuitive. The more difficult a software, the more time and energy it’ll take to properly adopt to your systems.
This software needs to be thorough enough to manage all of your equipment lease information, yet simple enough for anyone on your team to use it.
Don’t worry, this does exist!
Look for software that offers collaboration so that everyone on your team has access to leases, reports & analytics, as well as the ability to see when changes have been made and by whom.
Find a software that won’t take much training time. Make sure it’s a user-friendly, visual format that’s easy to learn and use.
This will create an efficient transitioning process for you and your entire team.
Step 12: Transfer your equipment lease data into the system
The time has finally come for you to upload all of your gathered data into your lease management software. Once you have done this, double check everything.
You’ll want to look at reporting again, to make sure it’s giving you all needed information. Look at all data to check that it’s filling in correctly and you understand the reports coming out.
This process may take longer than expected.
So allow yourself plenty of time for any complications that may arise during the system input process.
Conclusion: Take the transition one day at a time
For many, the journey to FASB 842 compliance seems time-consuming, overwhelming, and costly.
And while reporting on your equipment leases for the new accounting standards certainly presents a challenge, it doesn’t have to be overly complicated.
The key to a successful transition is proactive planning, detailed organization, a well-researched & intuitive software, and the support of your entire team.
If you need help getting started, here is a tool to guide you through the first steps to preparing your plan for FASB 842 compliance.
Additionally, if you don’t have a lease accounting software yet, here are some questions you should be asking as you vet providers.
The key is to start now.
If you're among the statistical majority - the 78% who aren’t ready - there is a lot of work to do.
However, by being proactive, pursuing bite-sized tasks, and taking things one step at a time, FASB 842 compliance can go smoothly.