Ten Steps to Accelerating Your Lease Accounting Project
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Ten Steps to Accelerating Your Lease Accounting Project
By Janet Sifers
February 1, 2021
Now that the calendar has turned over to 2021, most organizations are focused on year-end audits and are starting to consider their priorities for the new year. For private companies, it’s time to start thinking about how you’ll achieve compliance with the ASC 842 lease accounting standard. Most organizations with more than a few leases will want to build a plan for success. To make it easier to get started, we’ve outlined the ten key steps that you will need to take to accelerate your lease accounting project and comply with the standards.
As with any project, the more analysis and planning you can do up front, the more likely your project is to stay on budget and on schedule. Before you jump into selecting a software vendor and collecting data, we recommend companies invest time to review the technical standards and conduct an enterprise-wide census of their leases. We also recommend you assess the systems, processes, and controls supporting your current lease program. What are the strengths and weaknesses? For most companies, we expect that the greatest challenge won’t be the accounting, but actually populating the systems with the necessary data.
Another critical success factor is securing the executive sponsor to champion the project with the executive team, audit committee, and board members. A large-scale project like lease accounting requires dedicated oversight and governance for success. You are going to need dedicated project management resources to ensure that plans remain on schedule, within scope, and on budget. Let’s look at the steps now.
Step 1 – LEASE CENSUS
Before you start implementing your lease accounting project, it is important to understand the size and scope of your leasing program. If you do not have good systems in place to track leases, you should conduct an enterprise-wide lease census. Reach out to internal groups such as Accounts Payable, Procurement, Treasury, and Legal to get a count of leases. You do not need an exact count at this early stage but rather a ballpark estimate.
Answer the questions below to better understand the scope of your leasing program:
- How many total leases do you have?
- How many are classified as capital leases today versus operating leases? How many are real estate versus IT, fleet, or other equipment?
- How many leases are international versus domestic?
Step 2 – CURRENT LEASE PROGRAM ASSESSMENT
The next step in implementing your lease accounting project should be to assess your current leasing program. You will need to pull in your cross-functional team to conduct the analysis properly. Track a sample lease throughout its lifecycle – from upfront sourcing and negotiation with the lessor to final termination and return of the asset. Also, track the quarterly and annual close processes.
Answer the questions below to assess your leasing program:
- What organizations are involved in the process?
- What systems are updated with leasing data?
- What controls are in place?
- How does the process vary by geographic region, business unit, or asset type (real estate versus equipment)?
- How is accounting data sourced, verified, and reported?
Step 3 – DESIGN FUTURE LEASING PROGRAM
Next, you should design the “future state” after the new accounting standards are implemented. What business processes, controls, and systems should be in place by the 2022 implementation deadline? How will your leasing portfolio grow or change over the next five years? You will need to decide between a tactical approach that focuses only on complying with the new rules or a strategic approach that aims to improve the efficiency of your leasing program. For companies with immature leasing programs, a strategic approach may be the only option as an overhaul of the systems and controls in place may be necessary to comply.
Step 4 – SECURE BUDGET AND RESOURCES
With an understanding of the current leasing process and the desired future state, you should be in a good position to evaluate the level of effort required to implement your lease accounting project. You will need to secure the budget and resources before you can proceed. Most companies will need to acquire a lease accounting software application and possibly a new end-to-end Lease Lifecycle Automation solution. Due to the time and expertise required, larger companies may bring on a Big Four or other consulting firm to collect the data, install the software, and project manage the initiative. If you elect to run the project in-house, you will need to budget time for employees from IT, Accounting, and Project Management.
Step 5 – SELECT SOFTWARE
Start by defining the requirements. First, you will need to consider the scope. Do you need just a lease accounting system, or do you also need to upgrade your whole leasing process? Does your leasing portfolio primarily consist of real estate? Or do you have a diverse mix of IT, vehicles, and other equipment? Do you have a preference for a SaaS application or a traditional licensed software application? The answers to these questions will help you narrow down the list of vendors you engage to a reasonable number. Do some online research and then reach out to several vendors to get a demo of their software. Issue an RFP to analyze each provider’s functionality, pricing, and service levels so you can select a vendor. Learn more about the .
Step 6 – IMPLEMENT SOFTWARE
Once you have selected a software vendor, the next step in implementing your lease accounting project is to install and configure the application. For licensed software run on-premises, you may need help with the installation. If you choose a SaaS model, there will be no need for an on-site installation, but there will be some configuration work required. Ask if the vendor offers rapid deployment options with proven best practices that get you up and running in weeks. For multinational organizations with complex leases, you may need to implement custom workflows, controls, or business processes unique to your organization. And you may need to integrate the lease accounting application with your ERP system, general ledger or lease administration system.
Step 7 – DATA CAPTURE AND UPLOAD
The data capture and upload process will be the most time-consuming aspect of implementing your lease accounting project for most companies. At most companies, leasing data is not warehoused in a single enterprise-wide repository. It is scattered across various spreadsheets and applications. Some leases may be stored in a binder on someone’s desk or a file cabinet in their office. You will need to locate each of the leases, translate them into English, capture the necessary fields, validate the data accuracy, and resolve any discrepancies. Various internal groups will need to be consulted to locate the data, including Procurement, Legal, IT, and Accounts Payable. In some cases, you may need to reach out to landlords and equipment lessors to get details on rent calculations or end-of-term options.
Step 8 – ACCOUNTING ESTIMATES AND JUDGEMENTS
With all the contractual and operational data on leases collected, it is time to apply the new accounting principles to your leases. Each contract will need to be reviewed to assess whether it meets the definition of a lease. Those qualifying as leases will need to be classified as operating or finance according to the rules in the standard. Lease and non-lease components will need to be separated. The discount rates, initial direct costs, and begin and end dates will need to be determined for each lease. Assumptions, judgments, and comments for each step of the process should be recorded in your lease accounting system. These are just a few of the steps required.
Step 9 – TESTING
You will need to perform functional testing on your new lease accounting application to ensure that it produces proper accounting results. Below you’ll find the list of questions to answer during your testing process:
- Are existing leases being properly recorded for the new standard and the current standards?
- Are you able to simulate a new lease being processed from its inception to termination?
- Can you publish debits and credits to your general ledger?
- Are exception scenarios, such as election of right to expand options or partial equipment buyouts, working properly?
Test scripts and test data will need to be developed for various real world scenarios. Once you have worked through all the bugs, you will want to conduct user acceptance testing with members of the financial reporting and/or accounting organizations.
Step 10 – ROLLOUT, TRAINING, DOCUMENTATION AND COMMUNICATIONS
The final step in implementing your lease accounting project is to train the end-user community that will be accessing the lease accounting application. The users might include not only Accounting, but also managers of real estate, IT, fleet, and other equipment leases. Even those employees not using the system may be impacted by new business processes and corporate controls. Do you plan to standardize Lease vs. Buy analyses? Are there new processes to notify the Accounting team of changes to leases that may affect the way they are reported on the books? These policy changes will need to be communicated to the larger employee base.
By following these steps, you are laying the foundation for long-term sustainable compliance. Taking time to tackle these questions now will save you time and reduce risk in the long term, making your implementation go more smoothly and ensuring the right outcome for your business.
By following these steps, you are laying the foundation for long-term sustainable compliance. Taking time to tackle these questions now will save you time and reduce risk in the long term, making your implementation go more smoothly and ensuring the right outcome for your business.
Ready to take the news steps to accelerate your lease accounting project? Download our eBook, 9 Lease Accounting Compliance Lessons Private Companies can Learn from Public Companies.