How Lease Accounting Compliance Impacts The Lease Lifecycle
The hidden burden in the race to ASC842/IFRS16/GASB87 compliance is the commitment to building out the entire lease accounting model, as well as the ancillary lease management process. What you will not find on the internet, is any reference as to the overwhelming amount of manual labor that is required to support these business solutions, as the compliance burden is a new requirement and generally an addition to an existing worker/workload. ASC842/IFRS16/GASB87 conception to disposition has been written to help companies understand the encumberment ahead so that Finance/Accounting leadership can understand the multifaceted nature of the associated business responsibilities. ASC842/IFRS16/GASB87 compliance/conception to disposition is also designed to equip Finance/Accounting leadership with the information needed to make a ‘business’ decision, and avoid purchasing a software solution or signing up for an accounting service in a vacuum. The point is, there are many pieces to pull together to create a compliance solution. In parallel, there are many pieces to pull together to create an ongoing compliance support campaign, as the majority of companies out there are still manually processing lease accounting details from excel worksheets. Excel is the devil for lease accounting, as it invites human error, is labor-intensive, promotes lease accounting fatigue, and lacks the intuitiveness to discern any real trends or improvement opportunities. What companies need is to transform their business operations into an automated process that removes manual spreadsheet analysis and promotes the business efficiencies provided by a managed services model. What customers are asking for is an alternative to current lease accounting solution options. Customers want to distance themselves from the business distraction, monotony of bulk lease accounting workloads as well as the ongoing maintenance needed to support disclosure statements, all while managing a platform and application to support the business needs.
In response to the ASC842/IFRS16/GASB87 compliance mandate, due at the end of 2021, customers do not have the time to develop RFP’s, research solution combinations, audit and improve processes – all while doing their day job and supporting a software implementation. The trend to outsource lease accounting and lease management is exploding, as customers have come to understand that the amount of change they can digest is minimal, as the speed of business and the burden of compliance add zero business value to their company/organization. The answer is – outsource, have the solution delivered via a subscription-based model and avoid the distraction of trying to re-invent their internal processes during a global pandemic.
The bulk of the post compliant lease accounting work effort lies in the ongoing maintenance of disclosure reporting. To quote a 10B global accounting firm on Disclosure Statement objectives: BDO
FASB Accounting Standards Codification (ASC) 842-20-50-1 and 842-30-50-1 provide that “the objective of the disclosure requirements is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.” The standard further indicates that “a lessee [lessor] shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. A lessee [lessor] shall aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or by aggregating items that have different characteristics.”
ASC842/IFRS16/GASB87 compliance/conception to disposition Roadmap
The holistic burden of developing a compliance strategy is the most overwhelming aspect of achieving ASC842/IFRS16/GASB87 compliance. Achieving compliance (Lease Accounting) and maintaining compliance (Lease Management) are two very separate activities, requiring different skills, different departments as well as demanding unique analysis/experience into business operations.
The following Roadmap will help Finance and Accounting leaders to understand the depth and breadth of the ASC842/IFRS16/GASB87 compliance/conception to disposition process include:
- Real Estate – the first step in the conception process, the development of true business requirements based on expert market analysis, real estate knowledge, lease creation and contract negotiations. This step culminates with an executed lease contract.
- Lease Abstraction – this step is typically performed by a paralegal. This step in the process is where the lease specifics are consumed into a spreadsheet, where lease management activities can be scheduled and maintained, to ensure payments/renewals and assure lease performance compliance.
- Lease Entry – this is the ingestion of the lease by a platform or service, for the purpose of achieving audit acceptance from a lease accounting perspective. This is the pre-audit step, to ensure that the lease resides in an environment that is regularly backed up, secure, and able to provide accurate reporting.
- Technical accounting audit – this step is performed by a Sr. Lease Accountant and is a checklist of accounting activities to ensure compliance. Data accuracy and system controls are the bulk of the audit and need to be verified for compliance signoff.
- Rent Rolls and & Reconciliation – post Technical accounting audit certification, the lease is now ‘production-ready’, and is an active business contract – which will support the business through the life/expiration of the lease.
- Production Lease Management – the systems and reporting side of the lease management process, which is providing the systems and resources to ensure lease accounting compliance, as well as to comply with the latest updates and security, and disclosure statement reporting in support of the business.
- Disposition – this is the end of the lease term. Options at this point are to renew, renegotiate or to simply walk away and seek a new business relationship.
What is the biggest hurdle in achieving ASC842/IFRS16/GASB87 Compliance:
Year-end compliance is an aggressive goal for lease accounting teams. With Excel being the most common platform, the risks associated are significant – data entry error, lack of proper audit controls, automation to reduce lease processing times. Align with Leaseology for a comprehensive solution, and get back to building your business.
ASC842/IFRS16/GASB87 compliance/conception to disposition Key Takeaways
- Creating a comprehensive compliance program is a massive undertaking and is not of core business value and dilutes business focus – This is where you want a partner that provides a comprehensive service, so you can
- Companies need a partner to lead the compliance effort, migration and system selection – as the complexity and unique blend of skills does not align from a resource perspective
- Automation is needed for keeping up with the pace of change, as well as for the ongoing SEC reporting/disclosure statement updates and security requirements.
- Experts are required to help guide customers stemming from this new business capability/challenge
Leaseology understands what internal lease accounting teams are up against when it comes to ASC842/IFRS16/GASB87 compliance and has built an end-to-end solution that allows customers to divert resources, remove cost, increase accuracy/locate cost savings opportunities – all while achieving compliance via an outsourced lease management process. Although these responsibilities are not always handled by finance/accounting – they are corporate burdens and obstacles to profitability. Let the experts help you as at the core of the Leaseology service offering, our combination of industry expertise in lease accounting, compliance, reporting, and automation can help you meet your compliance timelines – allowing your team to focus on growing your business.
Ken Royce * Leaseology Inc * Board of Directors
ABOUT Leaseology Inc|
Leaseology, Inc is a North America-based business advisory services firm committed to accelerated marketplace adoption of digital technology, financial management innovation, and business operations practice excellence. These core competencies apply to real estate and equipment portfolios.
