Lease accounting is in the middle of a major transformation. With the start of 2019, public companies must start complying with new rules from the Financial Accounting Standards Board (FASB), which feature several significant changes including (but not limited to):
- Organizations must record any leases lasting one year or longer as right of use assets (ROUAs) on their balance sheets, together with corresponding liabilities. Previously, operating leases appeared in income statements as rent expenses. Capital leases must also be listed as ROUAs, separately from operating leases.
- Determinations of ROUA value and liabilities are more nuanced. They now factor in interim lease payments and other rents. Unless they are parts of month-to-month arrangements anticipated to run for less than one year, lease renewals must also be disclosed under the updated guidance.
- Liabilities for operating leases will be reported outside of traditional debt. That has pros and cons: On the pro side, it might be a boost for organizations that traditionally look too risky to investors. At the same time, companies still have to closely monitor their leverage to control risk.
Many organizations have been preparing for years for the changeover by 2019. However, there are still some hurdles to clear. What should companies keep an eye out for during the change? Let’s look at a few of the big challenges:
A siloed implementation process
The vast scope of the new guidance will bring up to $1 trillion in leases into official recognition. To make sure no lease is overlooked, it’s crucial to cast a wide net and get insights from as many members of your organization as possible. Inter-department silos, which limit information sharing and collaboration, can impede the transition.
Accordingly, while the accounting/finance team will still be in the driver’s seat during this journey toward the updated FASB standards, it’s prudent to get input from others in the IT, human resources and real estate departments, too. That approach ensures everyone is on the same page and fully aware of their responsibilities under the FASB’s ASC 842, so that there are fewer potential issues during asset auditing.
Such a collaborative approach to compliance helps you get an early start on assessing the impact of the changes on accounting policy and tax liability. These two issues were among the top seven identified in a 2016 PricewaterhouseCoopers/CPRE survey.
Data quality and accuracy
Traditionally, administering leases has been a complex process involving multiple tools that don’t fit well together, along with plenty of manual spreadsheet-driven processes. This mix of applications can create issues with data quality, accuracy and freshness, further complicating compliance.
The complexity of the new FASB rules makes spreadsheets less practical and puts a premium on modernizing and consolidating systems wherever possible. More than 40 percent of respondents to that PwC/CPRE survey said they planned to implement a specialized lease management system to help with compliance, and 20 percent were eyeing ERP upgrades, too.
Fortunately, LaSalle Solutions offers our cloud-based LAMP for comprehensive asset auditing and management. LAMP can track your leases, maintenance contracts and much more from a centralized platform that’s scalable across your entire organization.
Related Post: 5 Reasons LaSalle Customers Love LAMP
Inconsistent lease processing
Gathering all the lease data necessary for FASB compliance is a daunting task frequently worsened by years of inconsistent processes for requisitioning and monitoring these leases. It’s also common to have leases in different languages and formats, making data extraction more complex and time-consuming.
In this context, it’s imperative to standardize the process for lease accounting through a combination of technology and technique. Implementing tools like LAMP and collaborating with a partner like LaSalle on leasing solutions can change everything and make compliance more straightforward than if you tried to go it alone. Learn more by contacting our team today.
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