Public companies have just wrapped up their first quarter with the new revenue recognition standards. A lot of people are breathing a sigh of relief, but there’s not much time to celebrate. The new lease accounting standard, Accounting Standards Update (ASU) 2016-02 (ASC 842), is looming on the horizon.
Many organizations believe complying with the new lease reporting rules won’t be as big of a project with as many complexities. However, a bulk of the work is scoping the need. Unfortunately, many companies have underestimated the number of leases they need to address. In fact, according to KPMG’s 2017 Accounting Changes Survey, 53 percent of companies say have been caught off guard by the challenges they are running into.
Let’s take a look at the reality of work involved with lease accounting and why you should be assessing staff during peak season.
An overview of the new lease accounting standard
ASC 842 will affect virtually every public and private company in the U.S. It broadens the lease definition and requires virtually all leasing transactions longer than 12 months to be added to the balance sheet.
In November of 2017, FASB tweaked the guidance to simplify compliance. They gave companies the option not to restate comparative reporting periods and, under certain conditions, allow lessors to combine lease and non-lease components.
Despite these changes, only 10 percent of the 3,890 finance professionals polled by Deloitte earlier this year believe FASB’s changes will reduce the time and effort needed to implement the new standard.
Hurdles to compliance
The path to compliance is seemingly straightforward. Collect all leases, review and extract the necessary information and add it to the accounting system. For most companies, however, the process is more complex.
In large, decentralized organizations, lease data may be spread throughout offices all over the country or the world. Identifying all leases may require studying accounts payable ledgers, asset registers and vendor contracts. It may involve pulling in already overburdened and under-staffed resources to gather information from subsidiaries. Organizations with international operations may have leases in different languages, formats and currencies.
The first step is to identify all lease contracts. Then, compliance teams will need to read through every lease, extract the required information and collect it in an electronic format. Many companies that previously relied on spreadsheets to manage leases will need to change their methods. The complexity of balance sheet entries, disclosures and calculations required for compliance will exceed a spreadsheet’s capabilities. These organizations may need a dedicated lease management system to handle equipment and real estate, produce the required accounting records and integrate with their ERP system.
Finally, there must be communication across the organization, including with teams who are not experts in leasing or accounting. They need to be educated on the potential adverse impacts of certain lease terms going forward.
Assessing staff levels
Most companies were so preoccupied with revenue recognition efforts that they could not get an early start on lease accounting. Luckily, companies can use the same resources used for revenue recognition for ASC 842 compliance.
While mastery of traditional project management skills is essential, perhaps more crucial is finance and accounting expertise. Project managers without a finance and accounting background may struggle when it comes to the complex calculations required for financial reporting and tax strategies.
Candidates also need to work with cross-functional teams throughout the organization and with outside experts such as an accounting or advisory firm. That will require excellent communication, interpersonal and relationship-building skills.
The project will be behind before it even starts for many companies. They will likely need people with the technical expertise to assess the impact and build a plan as well as staff to aggregate the data. Being proactive with the options you have now can have a big impact on how well you fare implementation.
If you need experienced talent fast for your lease accounting projects, Parker + Lynch Consulting can help.