Whether you are a public company that did not benefit from the Financial Accounting Standards Board (FASB) recent announcement, or a private company with a potentially slightly longer implementation window ahead of it, now is the perfect time to evaluate the software tools you plan to use for managing your leases.
Lessees have a lot of changes coming their way in the FASB ASU 2016-02, Leases (Topic 842) accounting update. The new standard aims to add transparency to the economics of lease transactions, but in the process, the changes will disrupt traditional approaches to lease accounting, including the use of spreadsheet software. Companies that are aware of how the standard could potentially complicate their traditional approach to tracking and managing lease liabilities and assets can be better prepared for their new compliance requirements.
Why the New Standard Changes the Old Approach
The new leasing standard requires lessees to record all leases except short-term leases on the balance sheet. Another core change involves the expansion of presentation and disclosure requirements; lessees will now include information about significant assumptions and judgments used when classifying their leases, such as the determination about whether a contract contains a lease and how consideration is allocated, as well as additional quantitative disclosures, including total lease cost segregated by type, the weighted average remaining lease term, the weighted average discount rate, and a maturity analysis of lease liabilities.
These changes require companies evaluate all leases for compliance with the new standard and then track the leases for the duration of the lease contracts. Some companies have traditionally used spreadsheets for tracking leases, but with the types of information required by the new standard, this may no longer be feasible.
It’s Worth the Investment
Cost must also be considered. Early indicators suggest that implementing the leasing standard will be extremely expensive. Companies with significant leasing activities are expected to spend between $1 million and $5 million to accommodate the changes. In order to mitigate risk and adopt the new standard as quickly as possible, companies should consider the benefits of lease accounting software.
Starting the Search
Finding the right software can ease the pain of the new lease accounting standard implementation on several fronts. It can provide a thorough review of a lease-related information, ensuring that important accounting standard provisions are not overlooked. Software can also save valuable time through automation. It has the potential to assign accounting changes to lease provisions and automate necessary disclosures to streamline an otherwise complex process. These time-saving features could be critical for organizations with a high volume of leases.
The work on lease accounting doesn’t end after the initial adoption. Ongoing monitoring and review of the extensive lease data collected will be necessary to track lease modifications. Software relives some of the pressure on internal staff for lease monitoring and reviews.
Using software to implement the new standard also enhances accuracy. Organizations doing all the necessary calculations in a spreadsheet have increased risk of error.
Who Benefits from Using Lease Accounting Software?
So, who really gets the most out of lease accounting software? Companies in certain sectors, including commercial real estate, manufacturing, and construction, are good candidates and will certainly benefit from advancing software technology. In addition, companies with a lot of leases are also good candidates, due to the higher volume of leasing activity with new leases, lease modifications, and features within leases that trigger at different points. In essence, the more leases you have, the more you could benefit from using technology to handle the standard implementation.
If your organization is on the fence about whether to implement a lease software solution, you might want to ask yourself these important questions:
- How many leases does the company have?
- Will software or spreadsheets make tracking and reporting on these leases easiest for you?
If leasing software is the path that fits with your organization’s objectives, there are certain features to look for to make sure the product is the right one for your company. These features should make the compliance process easier and ensure accuracy of information.
Automation is critical; certain software tools can make automated footnote disclosures. Make sure the software you choose produces audit ready documentation–solutions like this simplify data management and help position your company for questions financial statement auditors will be asking. The right software should also account for the specific needs of your business. Think about your company’s lease portfolio characteristics, international reporting requirements, and any foreign currency translation needs. Consider ease of use, and only use products from vendors that are SOC 1 compliant.
When making a software selection, it’s smart to create a “wish list.” You can use this to compare the features of different available tools. Getting testimonials about lease accounting software from companies similar to yours is helpful. What worked for them? What didn’t? Once you have your list researched and ready, present your findings to management teams to get buy in.
It’s inevitable that companies implementing the new leasing standard will face challenges, but the process can be simplified with the right lease accounting solution. In order to meet compliance deadlines, make sure your company has a plan in place to adopt the standard and track the necessary information. Lease accounting software can help the process go faster and easier—but it’s up to you to find the right solution for your business.
For More Information
For specific comments, questions, or concerns about your lease accounting implementation, contact us or see our lease accounting resource page.
Published on August 05, 2019