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.
The FASB ASC 842 and IFRS 16 deadline is looming. It’s time to commence your road to lease accounting compliance.
Bart Waldeck and Rick Zelinsky from Tango talk about the key questions you should ask before heading down the road to compliance.
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.
“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.
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.
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.
Bart Waldeck and Aman Gill from Tango discuss traps to avoid and best practices to consider.
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.
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.
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.
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.
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.