Ten Steps to Implementing Your Lease Accounting Project
Outlined below are 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. Before you jump into selecting a software vendor and collecting data, we recommend companies invest a few months to review the technical standards and conduct an enterprise-wide census of their leases. We also recommend having an outside consulting firm assess the systems, processes, and controls supporting your current lease program. What are the strengths and weaknesses? For example, we expect that the greatest challenge for most companies will not 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 such as lease accounting will require dedicated oversight and governance for success. You will need dedicated project management resources to ensure that plans remain on schedule, within scope, and on budget.
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. 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?
Learn more about How to Conduct an Enterprise-Wide Lease Census.
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. 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)? Also, track the quarterly and annual close processes. 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 2019 (or 2020) 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 lease administration system as well. Due to the time and expertise required, most companies will 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.
Learn more about the Key Line Items in Your Lease Accounting Budget.
Step 5 – Select Software
Start by defining the requirements. First you will need to consider scope. Do you need just a lease accounting system or do you also need to upgrade your lease administration system? 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 an 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 Key Features of Lease Accounting Software.
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 to hire experts to perform the installation. If you choose an SaaS model, there will be no need for an on-site installation, but there will be some configuration work required. As with any software application, the “off the shelf” version provided by the vendor may not meet the specific needs of your business. You may need to implement workflows, controls, or business processes unique to your organization that the software does not support “off the shelf.” And you may need to integrate the lease accounting application with your 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.
Learn more about the Critical Success Factors for Collecting Your Lease Accounting Data.
Step 8 – Accounting Estimates and Judgments
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 FASB’s new rules. 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.
Consult the FASB and IFRS websites for a full description of how to apply the new accounting standards.
Step 9 – Testing
You will need to perform functional testing on your new lease accounting application to ensure that it produces proper accounting results. Are existing leases being properly recorded for the new standard and the current standards? IFRS and US GAAP? 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 versus 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.