Businesses have had to implement new processes and information systems to comply with the Financial Accounting Standards Board’s (FASB) new lease accounting standard, ASC 842. The new requirements aim to increase financial transparency by providing a clearer picture of a company’s financial position.
While the new accounting standard is relatively easy to understand, putting it into play can be challenging. Often the most problematic part is accounting for your organization’s assortment of leases, which can be a daunting task depending on the total number of lease agreements.
Furthermore, companies must be mindful of any leases embedded in other agreements. Automating, centralizing, and simplifying lease accounting operations streamline these processes.
What does FASB ASC 842 compliance require?
Although FASB ASC 842 didn’t completely redefine lease standards, it has undoubtedly overhauled them, forcing businesses to take notice. As companies continue to acclimate themselves to the new standards, a lease accounting platform should facilitate their efforts by continuously checking for compliance issues.
Consider your platform an internal source of checks and balances that continually weighs your organization's best interest against the lease accounting standards. The platform will simplify things by generating reports and statements for transparency along the way.
Ultimately, success with lease accounting will require that organizations transition to a highly automated record-to-report process. The benefits of using the right software will not only simplify compliance with the new accounting mandates but will also help to ensure your lease portfolio is managed properly.
Previously, only capital leases were required to be recognized on the balance sheet. The new standard will require organizations to recognize the assets and liabilities for all leases with lease terms of more than 12 months on the balance sheet. It also will require disclosures to help investors better understand uncertainties in the cash flows arising from their leases.
The mandate for better transparency in financial reporting is here to stay. Accepting that the changes will only continue and implementing the right tools and processes is critical to staying ahead of them.
The best and most advanced lease accounting systems provide users with all the relevant tools needed to successfully analyze the data and red flag any discrepancies that will hinder compliance. They incorporate an array of automated processes that make confronting even the most complex portfolios simple.
The lease accounting deadline extension, how should you manage the additional time?
Due to obstacles and the current economic climate, FASB offered a one-year deferral of ASC 842 for private companies, private not-for-profit (NFP) companies, and certain public NFP companies. The delay means those organizations have until January 2021 to comply with the new lease accounting rules, providing time to better manage the disruption caused by accounting changes.
As a result of the delay, some organizations have pushed the pause button on their decision to move forward with implementation and adoption. However, the delay poses potential long-term risks and challenges as the new adoption date approaches. Key areas of concern include decreased availability of quality consulting resources, less flexibility in software and services timelines, and premium prices for software solutions and support services.
While the delay may allow some firms to focus on core business needs, it doesn’t mean cancellation. Deferring adoption dates allows businesses to use an extended period of time to fine-tune implementation, achieve compliance with the new standard, and reduce overall compliance costs.
Be proactive by using this time to look into lease accounting software that will help your team prepare for the new FASB ASC 842 compliance. There’s a lot to research but, don’t worry, we’re here to help you easily manage all of your leases and help you reach full compliance as efficiently as possible.
Now, let’s dive deeper into how your lease portfolio will perform more efficiently than ever when you partner with the right lease accounting software.
Key features to look for in Lease Accounting Software
Lease accounting has many moving parts, but an effective platform will deliver an overall efficiency to your lease operations. It collects and stores all of your data and documentation in one convenient place. It should also allow your team to sort through information quickly to find specific data points according to keywords or other search criteria.
Lease accounting software is a category of financial applications developed specifically to automate the record-to-report processes for the new standards. The software takes information from a lease agreement and performs the required calculations to generate journal entries for the balance sheet, income statement, cash flow statement, and quantitative disclosure reporting.
Combining all of these, you start envisioning your central hub for lease accounting. Several overarching features will tie in to make your hub more robust. So what should you look for?
- Cloud-based: Spreadsheet-related issues are far more likely if you have various individuals responsible for your lease portfolio (e.g., finance operations split up in different geographical locations). The lack of centralization makes gathering your lease data into a single repository a daunting task, making compliance untenable. Cloud-based solutions automate the reports and disclosures required for ASC 842 compliance and provide you with a central repository for your lease documents.
- Custom configuration: Your organization is not like any other, so why settle for cookie-cutter lease accounting software solutions or pay a fortune for customization to align with your team’s process? You want software that makes it easy to optimize system setup for your exact needs without the high cost of custom development.
- Excellent user experience: A considerable benefit of the right lease accounting software is its flexibility and ease of use. You can use it for a quick reference or dig as deep into the details as you need. Paired with cloud-based software, you can access your lease data from anywhere, at any time, on any device with minimal effort. Searching through spreadsheets is officially a thing of the past.
- Lease types: Yes, real estate leases may get the most attention, but they’re obviously not the only type of lease. Be sure any platform you consider fully supports a variety of contract types (of course, including real estate) that apply to your business needs.
- Lessor functionality: You might not be the landlord type today, but that doesn't mean you won’t be tomorrow. In the event of such a scenario, select a platform with functionality that supports both ends of the leasing spectrum. Prepare your team so that no one’s stuck reinventing the technology wheel later.
- Audit trail: Any auditor’s list of must-haves will undoubtedly include a comprehensive, transparent, and navigable audit trail. A centralized, robust lease accounting platform will produce all the reports needed to demonstrate compliance. Confirm there are built-in audit trails providing transparency, as well as reporting options required to audit inputs and outputs. Additionally, that same reporting functionality will serve you well when presenting to key stakeholders.
- Validation: The new lease standards heighten the complexity of your lease accounting. Calculations and lease classification are not straightforward, so make sure your chosen platform has a proven track record of stability and endorsement from CPAs and financial accounting experts.
- Classification testing: FASB ASC 842 requires thorough testing based on numerous factors to determine the proper lease classification. This is where the right platform can add significant value, streamlining the classification process for you and minimizing the most resource-consuming aspects.
- Lease management and compliance: Because leases have several moving parts, things can and will pop up over the term of a lease, including renewal options, tenant allowances, and impairment considerations. These occurrences often require a reassessment of FASB calculations. However, the right platform will automatically identify and react to such circumstances.
- Data access and security: The threat of security breaches is important to consider when vetting software. A comprehensive lease accounting platform will have built-in data security measures to prevent sensitive information from slipping into the wrong hands. These measures should automatically backup all of your data, log activity, and reveal only relevant data to any specific user. Those that only need access to particular lease agreements won’t have access to every agreement.
Keep in mind solutions should also focus on the intangibles, like customer service and training.
How comprehensive is the lease accounting software’s training and implementation process for your team? Even with the best platform, answers aren't always obvious and can require help along the way. Likewise, ensure the platform is capable of growing with your organization to prevent another technology search too soon down the road.
Here are five key questions to ask when assessing customer service of a potential vendor:
- Do the implementation and success teams have a thorough understanding of lease accounting? You want a vendor and software solution with a highly-respected success team that can help you work through the issues that arise, especially given the new standards.
- Is the implementation team in-house or an out-of-house team? An in-house team gives you peace of mind knowing they're solely focused on the specific lease accounting software and have become experts on it. They also have relationships with other departments in the company, giving you better insights on upcoming releases and opportunities to provide feedback on enhancements through beta testing.
- Do they support a robust knowledge center with ample resources (e.g., articles, whitepapers, how-to videos) your team can access 24/7?
- Do they provide continual training opportunities via live webinars or workshops to grow your team’s knowledge of the software?
- How do they manage customer feedback to help with product enhancements and new product development (e.g., user feedback groups, beta testers, online forums)?
Technology evolves at an accelerated pace and stops for no one. It's imperative that you conduct due diligence and research the platforms currently in the marketplace that will best serve your needs. No matter when you’re in the market for a lease accounting solution, new functionality or capability will be just around the corner to continue to enhance your team’s processes. So don’t let that slow you down, or you’ll forever be waiting to pull the proverbial trigger.
FASB ASC 842 represents a sweeping change in lease accounting for organizations of all sizes. The right software solution can ease the transition and help ensure accuracy in reporting. Closely evaluating these key areas will help your business implement a lease accounting software that aligns directly with the new standard and your specific business needs.
Finally, do your homework
Choosing the right lease accounting platform is the first step in creating a central hub for your team’s data. Correct implementation and integration are equally important to ensure the most value from the platform, so be thorough and broad-minded throughout your search.
Looking to become compliant before the looming deadline?
Lean on AMTdirect's expert team of accountants and real estate professionals to help you transform your lease accounting operations from a resource burden to a source of value!