Only 90 Days Remain Until the Effective Date
The initial deadlines for the new lease accounting standards are now less than 90 days away and widespread panic is beginning to set in. Most companies are behind schedule either because they underestimated the level of complexity associated with adoption or because of the ripple effects of delays in related projects such as revenue recognition. To help companies in their final transition efforts, LeaseAccelerator prepared a list of the 90 Things Lease Accounting Teams Need to Do in the 90 Days Before the Deadline. A summary of the eleven key activities is outlined below:
Technical accounting leads will need to finalize their policy documents and practical expedient selections. For example, companies will need to decide whether to separate lease and non-lease components such as the various rent, utilities, landscaping, and janitorial costs that come blended together in real estate leases. They will also need to perform reconciliation activities and make adjusting entries to ensure that accounting under the current standards ties up to the new approach going forward.
Business Process Changes
To effectively comply with the new standards, many companies will need to update processes to more closely track leasing activities. For example, accounting teams will need to know when real estate teams expand the amount of floor space being leased or when the landlord raises the rent based upon changes to the Consumer Price Index. The record-to-report and monthly close processes will also need to be updated before the deadline.
Centers of Excellence
Many companies are building Centers of Excellence for leasing. Some organizations are co-locating these teams in Shared Service Centers that also perform invoice processing, collections, and other financial accounting tasks. Prior to the deadline, project teams will need to ensure that these leasing centers are fully staffed and trained on new systems, processes, and controls.
Lease Accounting Systems
Many companies are implementing new enterprise lease accounting software applications to automate the record-to-report process. In the last 90 days, final systems configuration activities will need to be completed such as provisioning user accounts, configuring disclosure reports, and validating accounting outputs. Additionally, project teams will need to work closely with their software vendors to understand any requirements that may not be ready before the deadline and identify manual workaround procedures.
Over 100 data elements can be required for each lease to ensure the proper accounting is performed. Data collection is proving to be the most time-consuming aspect of the implementation project as few companies historically had a central repository for leases. Before systems can go live, companies will need to finish inventorying their leases and capturing the rent, term, currency and other fields from each contract.
Testing and Validation
There are over 10 billion potential use cases to test under the new standards. For example, leases have many different payment structures that can be tied to inflation indices, last year’s sales or even union wages. At the end of a lease, companies can elect to terminate, renew, or extend month-to-month. Each of these variations has accounting impacts. No company will have time to test every permutation, but will instead prioritize testing of the scenarios most common to their leasing portfolio.
Accountants and lease administrators in the Leasing Center of Excellence will need to be trained on the companies record-to-report processes, financial controls, and leasing systems. Additionally, corporate functions such as procurement, contracts, and treasury will need to understand changes to procure-to-pay processes and lease versus buy strategies. Real estate, logistics, and operations teams will need to learn new asset tracking procedures.
Policies and Controls
With operating leases moving onto the balance sheet, there will be additional scrutiny from external auditors to ensure the accuracy of accounting under the new standards. Organizations should ensure they have implemented the appropriate controls to satisfy auditor concerns about existence and occurrence; completeness; valuation and allocation; rights and obligations; presentation and disclosures.
Audit Committee Communications
As the effective date gets closer lease accounting project leaders will need to provide additional updates to the CEO, CFO, internal audit and board audit committees on the status of the project. Pro-forma financials as well as potential implementation delays, issues, and risks caused by resources, systems, or external vendors will need to be shared and discussed.
Presentation and Disclosure
The biggest change to presentation will be the reporting of right-of-use assets and liabilities on the balance sheet. However, both US GAAP and IFRS require additional quantitative and qualitative disclosures along with adoption of the new standards. While the majority of the requirements impact financial statements that will be issued following the deadline, companies will need to disclose potential impacts from lease accounting in SAB 74 and MD&A sections of their upcoming 10-K filings.
Other Business Impacts
There are a number of other potential business impacts resulting four adoption of the new leasing standards. Some organizations might have debt covenants impacted by the additional liabilities transferring onto the balance sheet. Other companies might have executive compensation metrics tied to KPIs impacted by the standards. There are also impacts to tax accounting, processes, systems and transfer pricing to be considered. All of these issues will need to be addressed before the deadline.