Is it Time for your Business to Purchase Lease Accounting Software? by Whitney K. Schiffer, CPA
Time is up for private companies to comply with the new lease accounting standards (ASC 842), which require businesses to begin recording the assets and liabilities of all leases, including operating leases, on their balance sheets. For calendar-year companies, the new lease accounting standard is effective on January 1, 2022.
Private companies that have already begun the transition to the new lease-accounting guidance understand the challenges that come with identifying the complete universe of all their lease agreements, extracting and documenting all of the details and required data about those leases, and putting into place appropriate systems, processes and controls to maintain compliance over the long term. Those businesses that are still waiting on the sidelines must start planning immediately and be prepared for the process to be more complex and time-intensive than they may have originally anticipated.
In the general course of business, a company may lease a wide range of assets, including office and manufacturing equipment, IT and software, real estate, cars, trucks and even airplanes. Depending on the size and complexity of the organization, these leases may be scattered across various departments in different geographic offices, or they be embedded in service contracts, maintenance contracts, joint operating agreements and advertising arrangements. Sometimes, the only way to confirm that a lease exists is to review a company’s expense activity.
Once businesses identify all their lease arrangements, they must begin the tedious task of reviewing contracts and agreements to identify and record into their accounting systems all lease terms and all their rights and obligations under those agreements. Among the data that must be documented are the present value of the leased assets; amortization schedules for operating leases, finance leases (previously referred to as capital leases), and tenant improvement allowances; interest on lease liabilities; cash flow and costs resulting from leases. Under ASC 842, if a company misses an operating lease or fails to account for one, there could material impact on its financial statements.
Relying on Software
With the complexity of the new standard and lease arrangement in general, businesses may be unaware of all the details they need to capture and end up wasting a lot of time trying to track down this information. One way to counter this and help ensure that all appropriate data is captured on the first pass is to rely on technological solutions specially created to help businesses comply with the new standard. Software with artificial intelligence (AI) capabilities can help businesses extract and document quantitative and qualitative lease data and provide a robust solution for meeting obligations to regularly monitoring and maintaining this information, which can change over the life of the lease.
For example, a business may uncover a lease for a particular piece of equipment housed off-site and contracted to be managed by a third-party provider. The business must attempt to separate the terms of the lease from those of the service contract and allocate accurate consideration to each. If required reporting information is missing, the business will need to make assumptions and calculate how its hypothesis can affect the bottom line. Doing this work manually will require a significant commitment of time and resources to get the numbers just right and account for any subsequent negotiations or other actions that can change lease terms in the future.
Lease accounting software can go a long way toward accelerating and simplifying the processes of extracting and accurately documenting lease data and managing it on an ongoing basis. Businesses will still need to regularly review, monitor and track new lease arrangements, changes to existing lease terms and/or end-of-lease decisions that could impact both their operations and their financial accounting. However, by automating these processes, companies can quickly produce a snapshot of their entire lease population at a point in time and make quick decisions to fit within their budgeting parameters. It may even help businesses analyze the economics of their leasing decisions and plan more accurately for the future.
Making decisions to purchase lease-accounting software should be made under the guidance of experienced accounting and audit professionals who understand your business and its unique needs. This can help you save significant dollars and time by ensuring you invest in a solution that provides the appropriate level of functionality and can be implemented in the timeframe you require.
About the Author: Whitney K. Schiffer, CPA, is a director of Assurance and Advisory Services with Berkowitz Pollack Brant, where she works with hospitals, health care providers, HMOs, third-party administrators and real estate businesses. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.