Leasing compliance lessons for private companies
If you’re in a private company or government organization, you get an extra year to prepare for lease management compliance with ASC 842 and GASB 87. It’s the perfect time to learn from the real-world leasing compliance lessons from public companies that adopted the standards throughout 2019. Also, as you begin your implementation projects, you will have the benefit of being able to consult public SEC filings for your peers to see real-world examples of quantitative and qualitative disclosures.
One key example of this can be found when public companies in the first quarter of adoption struggled with leasing compliance issues such as proving the accuracy and completeness of their lease population.
Tracking leasing changes
However, perhaps the greatest challenge of all was the need to track changes to the lease portfolio. A company with 300 leases will have to track an average of 230 events in a single year as assets come off lease, new leases are signed, and changes occur throughout the lease term. Real estate leases have frequent rent changes as well as expansion clauses, tenant improvement allowances, and early renewal options that can be executed at various points in a 10-year lease.
Equipment assets under lease can be lost, stolen, damaged, purchased, returned, renewed or upgraded during the relatively short term of a three-year lease. Tracking these activities manually with spreadsheets and emails proves challenging to the most organized accountants.
Underestimating the leasing compliance workload
For public companies, collecting data, implementing systems, and modifying business processes were some of the largest work efforts required prior to day one. However, many additional activities needed to be completed as well, which many public companies underestimated. Most of these fell into the “last mile” of the project in the final 90 days before the transition. There are over 100 billion combinations of use cases that can exist under ASC 842 when considering the different payment structures and events that can occur throughout the leasing lifecycle.
Testing and staffing
In addition to developing a strong test plan, project teams will need to train end-users and communicate policy changes throughout the organization. Perhaps most importantly, companies will need to staff a team of lease accountants to perform ongoing analysis of changes to the portfolio. Some may even need to build centers of excellence that are specifically focused on leasing.
Integrating into the monthly close
Lease accounting will need to fit into an entity’s month-end close process. A proper lease accounting and Lease Lifecycle Automation system will have two critical features: all the features of a subledger, similar to an accounts receivable or an accounts payable subledger but with much more detail and the ability to properly close each period and provide both prospective and retrospective reporting information that respects information relating to prior closed periods.
While the deadlines are delayed, it’s the perfect time to think through how to set up scalable business processes for long-term compliance. For more recommendations and lease accounting lessons, download our eBook, 9 Lessons Private Companies can Learn from Public Companies.
To learn more about how your organization can stand-up lease accounting automation in 8 weeks or less with our guarantee, visit our website.
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