The Road to Lease Compliance

Cityscape background
Strategy
Policy
Inventory
Data
System
Process
Control
Sustain

Strategy

FASB ASC 842 and IASB IFRS 16 represent a material change to the way you will account for real estate, equipment and embedded leases. But before diving in headfirst, you’ll need to develop a strategy regarding how to most efficiently and effectively approach this change across your organization. Decisions you make at the beginning of the process will have significant time, cost and risk implications throughout your road to lease accounting compliance.

Four Dimensions of Lease Accounting Compliance Strategy

Four dimensions of lease accounting compliance strategy infographic

The Road to FASB/IFRS Compliance

The FASB ASC 842 and IFRS 16 deadline is looming. It’s time to commence your road to lease accounting compliance.

Lease Accounting Compliance, ASC 842 Compliance

Road to Compliance Podcast Series: Think Before You Act

Bart Waldeck and Rick Zelinsky from Tango talk about the key questions you should ask before heading down the road to compliance.

“Preparing for the new standards can be daunting. But organizations can mitigate the potential disruption by taking time now to assess their options, with a strong, cross-functional team of stakeholders across finance, real estate, operations and IT.”
Steve Miller, Managing Director and Global Lease Accounting Lead, JLL

Policy

Most accounting standards have an element of interpretation, and the new FASB ASC 842 and IASB IFRS 16 lease accounting standards are no exception. Understanding the implications and impact of the new regulations prior to embarking on the Road to Compliance is the only way to minimize costly mistakes and timeline risks. These are massive changes, make sure take them on with eyes wide open.

Data Challenges: FASB/IFRS Lease Compliance

FASB Accounting Standard Update - Leases: Putting Leases On the Balance Sheet

“Putting Leases On the Balance Sheet”, a video by FASB, looks at how organizations that lease assets can apply the new leases guidance and features discussion with FASB Member Daryl Buck and FASB Senior Project Manager Danielle Zeyher.

Lease Accounting Compliance, asc 842 lease accounting

Road to Compliance Podcast Series: The Definition of a Lease

Bart Waldeck, Tango’s CMO and SVP of Product Strategy, is joined by Kristin McLaughlin, Senior Director, Technical Accounting Consulting (TAC) at RSM US LLP, and Rick Zelinsky, Vice President of Product Strategy at Tango. In the podcast, they discuss what constitutes a lease, how to identify embedded leases, and how the treatment of leases is changing under the ASC 842.

asc 842 compliance, new accounting standard for leases

Road to Compliance Podcast Series: Lease and Non-Lease Components

Bart Waldeck, Tango’s CMO and SVP of Product Strategy, welcomes back Kristin McLaughlin, Senior Director, Technical Accounting Consulting (TAC) at RSM US LLP, and Rick Zelinsky, Vice President of Product Strategy at Tango discuss the first steps an organization must undertake if a lease is embedded in a contract – how to distinguish between the lease and non-lease components of that contract.

Inventory

The new standards have broadened the definition of a lease and companies are finding there is much more to the process of inventorying leases than meets the eye. Step one is to find all contracts across the enterprise, which is no small task given many are buried in different departments, filing cabinets, spreadsheets, or are managed by external third parties. Step two requires the development of a methodology to assess contracts and classify them, another daunting task. Making sure you have a comprehensive approach and structured process is the difference between spending weeks versus months in this stage of the Road to Compliance.

The Average Time Required to Review Typical Lease Contracts

“On the challenge side, companies need to move posthaste toward compiling a complete inventory of their lease contracts. Sometimes companies start in on a lease and they kind of forget about it until the lease ends. They might not even know where the lease agreement is. It’s a big step just to gather all the lease information.”
Rich Stuart, Partner, RSM US LLP

Data

Calculations under the new standard can require up to 75 different data elements across all types of leases – including real estate, equipment and embedded. Historically, most organizations have focused solely on real estate leases, and current systems do not capture potentially thousands of non-real estate leases, resulting in a massive data gap. Following a five-step process to data management with a focus on data quality is the only way to successfully navigate this stage of the Road to Compliance.

How are you collecting data from your lease controls to comply?

new lease standard, asc 842 compliance SOURCE: 2017 Lease Accounting Survey: Implementation Progress Report- PWC and CBRE

Why Lease Compliance Data is So Hard to Get/Locations for source date

new accounting standard for leases, accounting for real estate leases SOURCE: FASB's new lease standard: Accounting and implementation insights, Deloitte
asc 842 compliance, asc 842 lease accounting

Road to Compliance Podcast Series: Common Data Traps and Effective Data Management

Bart Waldeck and Aman Gill from Tango discuss traps to avoid and best practices to consider.

“We’ve learned that for the more complicated lease contracts, you can need to up 75 different data points just to determine how to account for your lease. Multiply that be 1,000 or 2,000 leases, and that amount of data is not going to work on spreadsheets anymore.”
Derek Bradfield, Partner, Deloitte

System

With change comes opportunity, and this lease accounting standards update is no exception. Take time to assess the solutions available to you. While many vendors are pursuing a patchwork approach to claiming compliance with the new standards, others have solutions that have been built from the ground up and are third-party verified to ensure it. Since any decision you make will involve a project not dissimilar to a full re-implementation, you have a unique opportunity to reassess the capabilities, limitations and costs of your current system and service provider.

What Companies are Planning Regarding their Lease Administration System

“Some key considerations for selecting a system include ensuring the system: supports dual reporting for US GAAP and IFRS, supports foreign currency needs, captures items required to support new disclosure requirements supports tracking and recording of the impairment of the ROU Asset...”
Marybeth Shamrock, Advisory Lead for Leasing, KPMG

Process

The majority of your lease processes will have to change with the new regulations. Identify, analyze and improve upon existing business processes within your organization, across all departments – accounting, legal, financial reporting, treasury, IT, etc. – to ensure you not only meet the new requirements by the deadline, but institutionalize this change for the future.

Compliance Matrix: Lease Touchpoints/Illustrative

new lease standard asc 842, asc 842 compliance
“Changes to the lease accounting standard have a far-reaching impact on lessees’ business processes, systems and controls.”
Alok Jain, Partner and Tricia-Ann Smith DaSilva, Senior Manager, PwC

Control

With new policies come changes to internal controls. Start by reviewing your existing control structure related to leases and assess whether your current reporting and disclosure practices require adjustments. New internal controls must be designed, established and documented for audit purposes to comply to the new FASB and IASB standards, as well as to ensure ongoing SOX compliance.

Committee of Sponsoring Organizations of the Treadway Commission (COSO)

Lease Accounting Compliance, real estate lease accounting
SOURCE: Understanding Internal Controls, University of California

Financial Executives International: Developing adequate SOX §404 controls for leased asset accounting requires identifying control points are very new and different.

Sustain

You have met the deadline, and everyone has breathed a collective sigh of relief. Now it’s time to consider the future. It’s not enough to comply once and go back to business as usual. Your organization must institutionalize these changes to ensure they represent a permanent shift in the way to account for leases. Understanding new responsibilities and collaborations are keys to ongoing success. Put processes in place to monitor compliance to ensure you are on course - and be ready to take corrective action if you are not.

Benefits of Sustained Lease Accounting Compliance

lease accounting, accounting for real estate leases

Tango does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any lease compliance related activities.