With the implementation deadlines for the new lease accounting standards approaching in the coming years, many controllers and accounting organizations are considering lease accounting software. At some companies, the business justification for investing in a specialized software application is straightforward. Developing the systems, processes, and controls to support major accounting changes is viewed simply as a “cost of doing business.” But at a number of other companies we have spoken to, there may be a need to provide a more detailed business case to support the investment.
With the deadline for the new lease accounting standards getting closer, more and more companies are beginning the process of collecting data needed for the transition. At first glance, the process to collect lease accounting data seems straightforward. Read each of the lease contracts and extract key terms such as base and variable rent, payment frequency, timing, and end-of-term options. However, before you jump head-first into reading contracts, we would recommend taking a few minutes to understand the common pitfalls and mistakes that other companies have made collecting lease accounting data.
For many companies, capturing lease accounting data will be the biggest implementation hurdle on the path to complying with the new FASB and IFRS standards. Few organizations have a centralized repository to track all of the information about their real estate and equipment leases. As a result, companies will need to go through a process to identify which data needs to be collected and where to find it. Once located, the data will need to be abstracted from contracts, validated to ensure its completeness, and reconciled between systems to confirm its accuracy.
The participation of a highly-engaged executive sponsor is one of the key factors that determines whether a big project will fail or succeed. As a result, experienced project managers are always on the hunt for a good executive sponsor. Demand for these heavyweights at most companies often exceeds supply as there are many more critical projects than there are sponsors. Busy executives can only afford to commit their time to a handful of projects. A C-Level executive who is sponsoring 10 projects on top of their day job will likely be ineffective.
If you are accustomed to tracking your leases in a spreadsheet or your real estate administration system, the concept of a lease accounting application might be new to you. You may be wondering, what exactly are the key capabilities of a lease accounting software application? Some features are obvious – for example, the software needs to be able to perform the proper accounting under the new lease accounting standards (FASB ASC 842) – but some are not.
As you embark on your lease accounting project, one of the first things you will need to do is assemble a team. While stakeholders from Treasury and Tax to Finance and Fleet will participate in this massive initiative, there is one key individual that everyone will be depending upon to make sure it all gets done – the lease accounting project manager.
A key factor in the success of your lease accounting initiative will be properly budgeting for the incremental resources and costs needed to successfully complete the project. Most companies will need to purchase a specialized lease accounting software application. They will need to get help from outside consultants to implement the software – especially with collecting and populating all the necessary leasing data.
You need both a lease accounting and a lease administration application to effectively comply with the new lease accounting standards. Should you use one vendor for both lease accounting and lease administration or should you take a best-of-breed approach? Having these two applications tightly integrated ensures that the accounting team is always aware of any new leases, modifications to existing leases, and end-of-term plans for expiring leases.
Since the publication of the new lease accounting rules, one of the most common questions we have gotten from Fortune 500 companies is: how do I find out what we lease? The real estate team knows what buildings we lease, but what about all the other things – photocopiers, office furniture, laptops, servers, forklifts, trucks, cars, or even aircrafts?
This article outlines the ten key steps that you will need to take to implement your lease accounting project and comply with the new standards. As with any project, the more analysis and planning you can do upfront, the more likely your project is to stay on budget and on schedule.