Guidelines to Implement New Lease Accounting Standards

by Managed Outsource Managed Outsource Solutions
Many organizations across a wide spectrum of industries lease equipment, real estate, and facilities for their daily operations rather than buying these outright. Any kind of lease arrangement involves huge volumes of data that are typically managed with the support of reliable data entry services. Lease accounting is a process where the lessee records rent expense over the lease item and a credit to either cash or rent payable. In February 2016, the International Accounting Standard Boards (IASB) issued IFRS 16 and the Financial Accounting Standards Board (FASB) issued ASC842, the new standards for lease accounting. The new accounting standards are scheduled to come into effect in 2019 and their main objective is to improve financial reporting about leasing transactions. When the liabilities that asset and property leases incur are represented on the balance sheet, financial transparency can be enhanced.

What impact will the new standards have? Studies state that the overall impact of these changes could lead to an extra $2 trillion operating lease commitments to be reflected as a liability on corporate balance sheets. All types of leases, whether vehicles, equipment or real estate would involve a considerable debt burden. PwC research shows that balance sheets will show an increase of debts by an average of 22%. For some organizations that lease excessively, this may increase by more than 200% if all the leasing contracts are included in the balance sheet. Transition to comply with the new standards involves a lot of work, especially if companies have many branches. 

Real-life Examples

When General Dynamic Mission System implemented the new standard, Adena Lerner, the controller for the technology company and defense contractor in Fairfax, Va. found that it would be difficult to extract information from each lease that is needed to comply with the standard and add it to the accounting system. Other finance executives also revealed that the time and resources taken to implement the new standard should not be underestimated and this challenge is faced by all companies. Lerner’s group started working on implementing the new standard in the summer of 2016 and they are still working on it. Extracting data from an estimate of 26,000 leases seems like a daunting task for the team.

Cathy DeGenova, CPA, director of SEC reporting and technical accounting at Avis Budget Group in Parsippany NJ said that they also underestimated the time required to extract information from 4,000 leases.  However, FASB has decided to simplify the design to reduce costs and the challenges involved. Although FASB’s recent decision makes implementation of new standards easier, it still presents a challenge to preparers.  So here are some tips: 

  • Gather all lease portfolios: The first and foremost step is to gather all leases. In the case of large decentralized companies, it requires a study of accounts payable ledger, vendors, asset register, financial details by country, P-card purchases and other information from subsidiaries. According to Lerner, lease of small items is difficult, but the team wanted to ensure that enough data was gathered to prove to the auditors that their efforts were working.  
  • Use cross-functional cooperation: Implementation of the new standards requires cross-functional cooperation and collaboration across the organization.  At General Dynamic Mission Systems, Lerner faced problems from other departments that had rarely worked with accounting earlier. However, after one year, there was cooperation between procurement and real estate. So, the key is to educate all the departments including procurement, IT, real estate and legal.
  • Apply a lease management system: Organizations rely on Excel to account their lease, but Excel’s capabilities are not enough for complex balance sheet entries, calculations, disclosures etc. Therefore, a lease management system using scorecard to examine all the options for an organization would be advisable. Lerner recommends looking at the capabilities of the organization’s existing real estate system to match with the new standards. If the organization’s real estate system is advanced, they may not have to read every real estate lease. The required data can be imported to the lease sub-ledger easily.
  • Manage international challenges:  In the case of international organizations, leases may be in different languages or in different formats. Foreign lease adds an additional layer of complexity. It would be more practical and efficient to manage the international lease with separate timeline. EU privacy laws also increase complexity by limiting the type of data an organization can upload to its cloud-based data storage system.
  • Make a plan: Organizations should select a lease management system by evaluating the process for adding new leases to ensure that the chosen system is not difficult to use. With access to all data in a lease management system, the teams can coordinate and conduct detailed analysis on lease portfolios. The process of managing leases and developing checklist of items in new leases can be centralized. 

Accounting data entry is tedious and requires minute attention to detail, and is best entrusted to a dependable data entry company. The new leasing accounting standards are challenging for companies that are related to accounting. The organization will have to record all the relevant contracts anew. Apart from the regular leasing expenditure, other expenses will have to be included as for example, any starting and ending costs for the lease.

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Created on Jul 14th 2018 03:41. Viewed 676 times.


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