With its effective date of 2018 looming around the corner, an important issue of FASB’s most recent lease accounting standard (ASC 842) is the potential challenge that Lease Administrators, CFOs, and accountants will have with managing many more lease agreements.
Now that lease agreements outside the United States are required to be recognized on balance sheets, compliance will become more complicated. Globalization has resulted in an ever-increasing pressure on accountants, lease administrators, attorneys, and their firms to manage leases in a fast, reliable, and cost-effective way.
We have summarized several common points that the “Big 4” accounting firms believe should help address the new regulation.
1. Take action now
Even though compliance with ASC 842 doesn’t start for at least another year, Ernst & Young suggests conducting a preliminary assessment as soon as possible to understand how your lease accounting will be affected. This will allow you to gauge how much time your company needs address the change. Start by identifying the sources and locations on all leases, then centralize them.
If your business is geographically dispersed, this process may be a challenge, so appoint someone to the task of owning all lease documentation, then funnel all leases through that channel.
2. Update IT systems to aid ASC 842 compliance
Dealing with the new reporting requirements for leases will, according to KPMG, probably require your organization to modify IT systems to facilitate the storage, management and eventual analysis of each lease that enters your system.
Along with the IT system, you may need new software that will allow for the actual scanning, managing, and analyzing of leases.
While these changes may take more effort initially, over time, they should become incorporated into your regular business operations and processes.
3. Develop your new workflow
As more steps are added to how you handle leases, the workflow will expand, and may include more people than it did formerly. From gathering the leases to getting them abstracted for ASC 842 reporting, your accounting team may need more time to prepare balance sheets than it has in the past, so plan accordingly.
Deloitte suggests developing a cohesive new workflow to address how your team will inventory, organize, and gather data from lease contracts, as well as communicate that data to the appropriate employees.
4. Understand the greater impact
There may be a lot of change, and organizations may not truly understand the impact — process-wise, budget-wise, et cetera — until they have invested time and resources into the transition.
PWC stresses the importance of analyzing how this new regulation will affect your business, including change management, staffing, and especially your leasing strategy.
The fifth change that isn’t discussed in detail by the Big 4 is the fact that many organizations will have leases in languages other than English. It’s imperative that you add time for this, account for it in your IT upgrade, include sufficient resources for it in your workflow and research the level of impact this has on the accounting team’s ability to abstract leases to meet ASC 842 requirements. It will take time, money and collaboration to overcome this in a cost-effective way.
Leases are typically in PDF or XPS format, which makes it challenging to apply standard translation tools to. Typically, one lease can take a week to translate and cost thousands of dollars, but it doesn’t have to. If you have many leases (some companies have thousands), trying to translate them without specialized technology is incredibly expensive and time-consuming. It’s imperative that you work with a translation services company with experience in translating leases contracts to ensure that you remain compliant under the new ASC 842 in a cost-effective way.