Is it Time for your Business to Purchase Lease Accounting Software? by Whitney Schiffer, CPA
Private companies and nonprofit organization struggling to adopt the new lease accounting standard (ASC 842) are getting a reprieve from the Financial Accounting Standards Board, which voted to delay the effective date of compliance by one year to Jan. 1, 2021. Affected entities should use the additional time to consider how they can more effectively identify and manage leases to meet the new standard and what impact it will have on their financial reporting going forward. For many, engaging professional accountants and purchasing software to manage lease assets will be their best options.
The FASB first introduced the new lease accounting standards in 2016 to improve financial reporting transparency by requiring businesses to begin accounting for all of their operating leases on their balance sheets for the first time rather than in the footnotes of their financial statements. Recognizing the dramatic impact of this requirement, the FASB estimated that more than $3 trillion in lease assets, liabilities and expenses would move to taxpayers’ balance sheets and result in material changes in reporting of income, cash flow, debt and equity.
Private companies that have already begun the transition are learning a lot from the challenges of public companies that faced a January 2019 compliance deadline, including identifying the complete universe of all of their lease agreements, extracting and documenting all of the detailed and required data about those leases and putting in place appropriate systems, processes and controls to manage compliance over the long term. Those businesses that are still waiting on the sidelines should start planning immediately and be prepared for the process to be more complex and time-intensive than they may have 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 not be easily found in one data repository. They may instead be managed by different executives in different departments across different geographic offices and subsidiary companies.
Even in the case of a small business with just one location, it may be difficult to identify all leases, which can be embedded in service contracts, maintenance contracts, joint operating agreements, and advertising arrangements. Sometimes, the only way to know that a lease exists is to review a company’s expense activity.
Once businesses identify all of their leases, they must begin the tedious task of reviewing contracts and agreements to identify and record into their accounting systems all lease terms and all of their rights and obligations under those agreements. Some of the data that must be documented include the present value of the leased assets; amortization schedules for operating leases, capital leases, and tenant improvement allowances; interest on lease liabilities; cash flow and costs resulting from leases.
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 waste a lot of time trying to track down this information. One way to counter this and help to ensure that all of the appropriate data is captured on the first pass is to rely on technological solutions created especially 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 discover that it leases a particular piece of equipment located off-site as part of a contract it has to outsource certain services to a third-party provider. The business must attempt to separate the terms of the lease from those of the service agreement 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.
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 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. Automating these processes allows businesses to quickly produce a snapshot of their entire lease population at a point in time and make quick decisions that fit within their budgeting parameters and may even help them to analyze the economics of their leasing decisions and/or to more accurately plan 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 time frame you require.
About the Author: Whitney K. Schiffer, CPA, is a director of Audit and Attest 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 firstname.lastname@example.org.