Achieving Compliance
The complexity for achieving ASC842 compliance is an enterprise challenge, that starts with the modernization of your lease accounting portfolio, impacting EBITDA reporting, SOC1, and Compliance reporting, while creating an ongoing challenge with maintaining compliance. This is much more than an accounting issue; it is a business issue – which requires collaboration with experts to solve. Roadmap for achieving and maintaining ASC842 Compliance for 2021 has been developed to help executives understand the burden of Lease Accounting compliance. Having a roadmap will enable the CFO with visibility into the financial risks associated with month-end close and disclosure reporting, so lease accounting issues are resolved. Your goal is to ensure that your company has a static Lease compliance program in place and a post compliance program to support ongoing change. Our goal is to equip Lease Accounting/Lease Management Executives with the information necessary to develop a roadmap for achieving compliance, addressing business challenges, and automating the maintenance of lease portfolios.|Leaseology
The issue Under ASC842, for (Equipment and Real Estate) operating leases, the amortization of the right-of-use asset and interest expense related to the lease liability are recorded together as lease expense to produce a straight-line recognition effect in the income statement. The purpose of the new lease accounting standard is to increase transparency and require organizations to disclose lease assets as assets and liabilities on the balance sheet whereas the former lease accounting standard (ASC840) reported operating leases as an annual journal entry, requiring significantly less effort and guidance. In regards to the capitalization of the present value of the resulting future lease payments leading to the creation of a right of use asset and the corresponding right of use liability.
What is the COVID impact on ASC842 Compliance?
Virtualization is a by-product of COVID, which has manifested itself in reducing office space requirements, increased home office uses/challenges as well as creating a new set of accounting challenges around deferred rent, rent compliance and EBITDA reporting for operating leases.
The complexities of ASC842 compliance are significant, and like any good regulatory agency, the standards have a certain degree of interpretation, which is why our customers are moving to Leaseology’s managed services to help align the Roadmap to their unique requirements.
These new standards have created a significant burden for lease accounting departments across the nation, which makes achieving ASC842 compliance an onerous task that is labor-intensive, highly manual (mainly excel spreadsheets), and requires extensive effort from an audit, entry, and tracking perspective.
Many firms have underestimated the impact of ASC842, from an operational perspective, so we thought we would help identify key areas that are under scoped from an effort, labor and complexity perspective:
- Re-classification of existing leases
- Audit and verification of compliant amortization schedules
- Management of individual lease records
- System security and accounting guidance updates, to synchronize with the latest legislative and cybersecurity requirements
- Reporting – disclosures to align with compliance requirements
ASC842 Risk Overview:
The majority of firms are leveraging excel as a platform for building their lease abstractions, generating journal entries, creating lease payment schedules, and transmitting disclosures. Although excel is capable of supporting these lease accounting activities, it is an intensely manual process that is punishing from a lease accounting, lease management, and reporting perspective.
What is not understood about the excel platform is the risk associated with this highly manual process, as excel is not a commercial real estate lease management software and using it as such creates the following procedural vulnerabilities:
- Spreadsheet management and controls – risk issues include: human entry errors, lack of data parameters on inputs, inability to validate data, insufficient data validation accuracy controls
- Volume of transactions increases exponentially – whether it’s a capital lease or operating lease accounting portfolio that you are tasked with, achieving ASC842 compliance thresholds, requires significant re-work on how you have built your amortization schedules.
- IBR calculations are complex – FASB lease accounting guidance requires data accuracy. Without proper controls, you will be generating significant audit expense as well as introduce potential lease management issues
- SOX controls – Proper signoffs, segregation of duties, and approval processes around HR and Financial payment processes are key challenges around achieving GAAP compliance.
- Audit procedure is long and tedious – the more manual the lease management process, the longer and more expensive the supporting audit process will be. It is imperative that customers look to providers that have the sophistication in their software, as well as the expertise needed to remove risk from its customers. Auditors are expensive and auditing improper controls, systems, and resources – creates an expensive proposition for lease accounting leadership.
- SOC1 reporting – Manual system processes create manual system reports, which expose risk in two areas: Data Accuracy and Compliance reporting. To help lease accounting practitioners, a reliable and automated system is required as the alternative is hourly auditors – who are expensive.
- Disclosure reporting – Probably the biggest challenge in achieving ASC842 compliance is with the creation of disclosure statements, to capture and report on monthly amortization and interest calculations. This 2019 change to lease accounting processes, is a significant modification to the previous lease accounting and management process and is a poor fit for manual, excel based processes.
- Additional headcount and payroll expenses – the aforementioned components provide insight into the workload impact on lease accounting teams, in achieving ASC842 compliance. Whether it be equipment or commercial real estate lease management, the teams supporting these processes are not set up to provide the reporting, controls, or data integrity required to meet compliance requirements. The challenge is exacerbated by the additional process burden, so not only do teams not have the tools for success, they are being inundated by the extensive manual processes that are new to the new lease accounting standards.
COVID Impact on ASC842
Corporate roadmaps have been highly impacted by COVID influenced business changes, which have a direct impact on equipment and real estate leases by not having readily access to lease documents, tracking critical dates, and clear understanding for new lease accounting compliance as the new normal has created the following challenges to traditional business operations:
- Real Estate – Virtual employees have significantly reduced the need for office space/square footage. Most firms are looking at downsizing their building requirements, as well as deferring rental spending – in response to this trend
- SPLA – Software Provider Licensing Agreement – The rent or leasing of a software license/subscription – as employees become more virtualized, tracking their expiration dates on assets is now a reporting and compliance risk for businesses, as these assets now carry a monthly disclosure responsibility, as well as influence the way EBITDA is calculated.
- BYOD – Bring your own device – If an employee is remote, how do you calculate personal versus business usage? Is it a corporate asset that requires a lease? New interpretations of this policy, based on trends may impact reporting.
- Office/Home office Equipment usage – How do you track the leases on displays/monitors, chairs, desks, and printers? More and more of the leased assets are making their way into employee home offices, so understanding the logistics around leased equipment as well as managing the leases themselves, has created exponential growth for this type of lease accounting
- Reporting – Each of the aforementioned areas carries with it a new reporting requirement, born out of ASC842 compliance – whether it be in the form of a disclosure statement that needs to be generated or EBITDA reporting discernment.
ASC842 Compliance Strategy Roadmap Key Takeaways
- Manual Lease Accounting is not of core business value – outsource
- Lease Accounting experts are needed for accurate reporting/fine avoidance
- Automation is needed for keeping up with the pace of Compliance changes
- ASC842 Compliance Strategy Roadmap Checklist
Leaseology understands what internal lease accounting teams are up against, and have 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. The following six pillars of success are the core of the Leaseology service offering, and we are confident that our combination of industry expertise in lease accounting, compliance, reporting, and automation can help you meet the ASC842 compliance requirements.
Download a roadmap on How to achieve ASC842 compliance on an automated platform, while reducing CFO level risks associated with month-end close or disclosure statement generation issues.
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.
