As we usher in the new year, many organizations are turning their attention from the implementation of the new FASB revenue recognition standards to the new lease accounting standard. Time is running short, and many accounting and real estate teams are finding that compliance will be more challenging than initially expected.
According to the Journal of Accountancy, “Almost one-fourth (23%) of companies surveyed in May 2017 by PwC and commercial real estate services firm CBRE said they hadn't started their lease accounting adoption efforts yet. And a Deloitte survey showed that 31.4% of more than 2,150 executives polled in May 2017 said their organizations were unprepared to comply with the new standard.” That means there’s a lot of work left.
One of the first items of business for most organizations is to choose technology to support the complexity required for compliance. Since this is a type of decision you’ve likely not made before, it can be difficult to know exactly what to look for in a solution and a vendor partner. After working with dozens of our clients who are already on the path to compliance, we’ve been able to compile a list of the most important requirements.
1 – CPA Validation and Endorsement
We’re not going to lie, the calculations and analysis required to provide accurate reporting under the new standard is complex. There are a number of considerations that go into lease classification and the calculations are not always straightforward. That’s why it is essential to choose a solution that has been validated by accounting experts. You should have confidence that both the math and the classifications will be correct.
2 – Support for Multiple Contract Types
Real estate leases may represent the biggest dollar value, but many organizations are finding that gathering information and preparing to report on other types of contracts will be more of a challenge. Look for a solution that will work well for real estate, equipment, vehicles and other agreements like embedded leases. Also ask about how master leases will be addressed and licensed.
3 – Lessor Capabilities
Keep in mind that the standards apply to both lessees and lessors. Even if your organization does not play the role of landlord today, it may be something that comes up in the future, so it makes sense to choose software that can support both sides of the fence.
4 – Lease Classification Test
Under the new FASB leasing standard, each lease will be classified as an operating or a finance type lease. The classification is based on a number of factors, including the Net Present Value compared to market value, the useful life of the asset, the existence of a purchase option and more. The best FASB compliance solutions have an easy-to-use classification test to help teams make the correct determination. They also support the calculations for both operating and finance leases.
5 – Integrated Lease Management and FASB Compliance
Certain events that commonly happen with a lease, such as execution of a renewal option, receipt of tenant allowances, or impairment will trigger a reassessment of the FASB calculations. Because these events are so frequent, it makes sense to choose a FASB leasing compliance solution that is part of the system that supports daily lease management. Any “trigger event” that is entered by the lease administrator, should kick off the necessary FASB reassessment and accompanying journal entries. Some solutions sit in between the lease management system and the accounting system, creating additional opportunities for error and data latency problems.
6 – Implementation Ready Solution
There are no shortage of technology firms claiming to have a solution that supports compliance under the new standard, but many of those vendors have not yet started any active implementations with clients. Most organizations did not adopt the standard early, so your vendor of choice may not have any clients that are 100% through their transition, but make sure that they have clients that are well down the road and that the software is in production, not just still in the testing phases.
7 – Implementation Services
You may want to consider a turn-key implementation in which the vendor provides everything from lease identification to abstraction, or you may only need help with the technical aspects of the deployment, but in either case it makes sense to turn to a partner with an expert in-house team of accountants, implementation consultants, and lease abstraction specialists who can provide exactly the level of support you require.
If you find a vendor that can deliver on all seven of these priorities, you will be well positioned to meet the mandate’s deadline on time and to simplify continued reporting and compliance. This is a high-stakes challenge, so it pays to be selective and choose a partner that earns your trust.