Most public companies significantly underestimated the hidden challenges associated with implementing the new lease accounting standards. They started late. They did not assign enough resources. And they did not allocate enough budget.
A recent KPMG survey found that the cost of lease accounting projects increased at 62% of companies over the prior 12 months. And almost 1/4 of companies are spending more than $500K on implementation.
The good news is that private companies have an extra year to adopt the standards. And private companies can learn from the mistakes of their peers in public markets by avoiding the key pitfalls that created much of the last-minute chaos around the initial deadlines.
A few of the hidden challenges lease accounting projects introduced for public companies include:
For most companies, the hardest part of the project is simply figuring out “what do we lease?” Historically, few organizations have maintained a centralized listing of all the assets they lease. Be prepared to go through a scavenger hunt across the organization searching through vendor invoices, file shares, and contract repositories to identify anything that might be considered a lease.
Once you find all the leases, you then need to abstract the relevant data needed to perform the accounting calculations. In some cases, over one hundred different attributes of a lease may be needed to perform the initial measurement and recognition. Rent payment formulas, frequency, and timing as well as initial direct costs, security deposit amounts, and end-of-lease residual guarantees are just a few examples.
Few companies have historically used an enterprise software application to track their leases. There are traces of lease data scattered across ERP, accounts payable, fixed asset, and procurement systems but no centralized system. As a result, you need to explore purchasing a dedicated lease accounting application with a specialized accounting engine and dedicated sub ledger.
Unlike most accounting change projects, lease accounting cannot be successfully managed within the four walls of the controller’s organization. ASC 842 requires participation from a number of headquarters functions as well as the various business units. And most of these teams need to be “sold” on the reasons why they should invest time in an accounting project that serves no obvious benefit to them.
There is very little standardization in leasing contracts. Pricing and contract terms vary greatly across asset categories, geographic regions, and leasing companies. As a result, most companies portfolios have a mix of different payment structures, frequencies, and timings as well as different end-of-term options and guarantees. You need a bulletproof test strategy to ensures that you the outputs of your lease accounting system are accurate.