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Optimizing the Four Critical Steps to Meet the Lease Accounting Compliance Deadline

by Colleen Tigges

Simply finding existing leases and extracting the necessary data is more time-consuming than many companies anticipated. However, there are some steps companies can take to optimize their data collection process.


In 2016, the FASB and IASB announced new lease accounting standards, ASC 842 and IFRS 16. The new standards will require companies to report their operating leases on-balance sheet, rather than in the footnotes of financial statements. As a result, leasing programs will face increased auditor scrutiny, and will require companies to establish new processes, policies, and controls in order to accurately track leases.

Achieving compliance with the new standards has not been an easy path for most companies. There are multiple steps required to successfully implement the standards, each critical for compliance. However, many organizations are still only at the beginning of their projects and time is running out. Public companies need to implement the new standards at the start of their first fiscal year following December 15, 2018. That means public entities with a fiscal year end on December 31, 2018 will have to implement by January 1, 2019, only a few months away.

With the deadline approaching, many organizations are concerned they will not be able to complete the implementation project by the deadline. If that is the situation for your company, consider the following methods to optimize your approach to the four critical implementation steps and accelerate your time to compliance.

Data Collection

The first priority for almost every company is collecting lease data. Due to the new requirement to report leases on-balance sheet, companies will be required to track their lease data closer than they ever have before. The necessary data will include fields for calculating lease payments, recording likely end-of-term options, and determining lease classification, among others.

Data collection has also been the most challenging part of the implementation project for many companies. Under the old standard, most organizations did not have a centralized process for documenting leases. As a result, large companies likely have leases scattered around systems, spreadsheets, and file cabinets all over the world. Simply finding these existing leases and extracting the necessary data is more time-consuming than many companies anticipated. However, there are some steps companies can take to optimize their data collection process:

1. Know what to collect: Before starting your search for leases, you should create a list of all of the data you’ll need to collect to comply with the new standards. You don’t want to finish your data collection process only to find that you missed certain crucial data fields. To create your checklist, consider utilizing your lease accounting system, if you have one, as a guide. Learning which data fields the system requires will allow you to efficiently extract everything you need from your leases the first time around.

2. Check with Accounts Payable: Once you know what data you need, a good way to find your leases is to use a program to search through your accounts payable system for payments recurring monthly, quarterly, or yearly. You may not find all of the information you need for lease accounting stored in the AP system, but you will at least have a list of leases that you can use to start a more intensive search. This is also a good method for finding potential embedded leases – arrangements that are embedded within non-lease contracts (like service contracts) that qualify as a lease under the new standards.

3. Send out surveys: Survey the groups that are most likely to use leased assets, including Real Estate, IT, and Operations. This method will help you track down leases and record up-to-date data. Keep in mind that tracking these assets down is not the first priority for these groups. To get their cooperation, consider offering incentives for completing the survey or instituting penalties for not responding.

4. Narrow the areas of risk: Large organizations have so many assets on lease that many are not sure they can find all of them by the deadline. If that’s the case for your organization, focus on narrowing the areas of risk as much as possible so that if you miss any leases, you can prove that they are not material. Consider descoping certain categories of leases, such as low-value leases. You may also be able to argue that certain contracts do not meet the definition of a lease.

Software Selection and Implementation

Companies with significant lease portfolios will likely need to invest in a lease accounting solution. A lease accounting solution is an application specifically designed to track the lease data required under the new standards, and then generate the required reports and disclosures. These are often enterprise systems, so you will want to make sure that you budget enough time for the selection, implementation, and training phases. Consider the following methods to optimize each.

1. Selection: Before requesting RFPs from various software vendors, determine a list of requirements. Consider: 

  • Do you report under both US GAAP and international standards? If so, you will need a solution that can complete accounting for both ASC 842 and IFRS 16.
  • Do you have a variety of lease types with complex end-of-term options and variable payment structures? If so, you will need a system that can be quickly updated to support your unique lease cases.
  • Will you need to develop new processes, policies, and controls? If so, you will want a system that can help ensure you can enforce ICFR for SOX.
  • Do you plan to integrate with the general ledger or AP system? If so, you will want to bring in your IT team to discuss your integration requirements.

Once you have developed your requirements and determined a short list of software vendors, request a demo of the software. Be sure to provide some of your own complex cases for the demos so that you can determine whether the software can actually meet your company’s requirements. You don’t want to get halfway through a software implementation only to discover that the software can’t actually meet your company’s requirements.

2.  Implementation: Ensure that your chosen vendor has a process in place to assist with implementation. Lease accounting under the new standards is a complex process and every company will have different requirements for the software. For example, you will need to configure master data, such as general ledger codes and financial variables, assign user roles and responsibilities, and set up reports for disclosures or management reporting, to name a few. You do not want to be left on your own to configure the software to meet your company’s specific needs.

3. Training: First, ensure that your chosen vendor has an established training program to teach end users how to use the application, as that will expedite the training process. Next, determine who will need to be trained. Do you want to provide access to all employees that use leased assets so that they can keep the data up-to-date themselves? Or would you rather establish a center of excellence or shared service center in order to limit access to specialists who can update the system based on attestations from asset users? The more employees with access to the system, the more training will be required.

Processes, Policies, and Controls

Many companies are so focused on collecting their existing lease data, that they postpone designing processes, policies, and controls to maintain their lease data after the deadline hits. However, that could be a costly mistake. Keep in mind that there is no gap between the effective date (when you have to implement the new standards) and Day 2 (when you have to start maintaining lease data to stay in compliance).

For example, you may sign a new lease the day after your effective date. If you have not designed a process to document that new lease, you will have already fallen out of compliance. A good way to prioritize which processes, policies, and controls to develop is to focus on the expected significant audit assertions. You can focus on optimizing the lease program later.

Completeness: Companies will need to prove that they can capture new leases as they are signed. For companies with a large real estate lease portfolio, this will mean developing a process with Corporate Real Estate to alert Accounting of any new leases or updates. Accounting can then document the required lease data in the lease accounting software. 

For companies that also have a significant equipment lease portfolio, two organizations, Procurement and Treasury, will be critical for capturing new leases. Consider setting up a process with Procurement to send new leases to Accounting for analysis and upload into the system. You may also want to set up a lease versus buy process with Treasury to approve any asset requests over a certain dollar value, so that you have a record of all the leases that should be documented in the lease accounting system.

Accuracy: Companies will also need to prove that their balance sheet, income statement, and maturity analysis report are accurate. First, you need to confirm the accuracy of the data being used to generate the reports. Consider developing a process to periodically request attestations from the employees using the leased assets. You will then need to test the accuracy of the reports generated by the system. Periodically pull a random sample of leases, covering as many lease structures as possible, and check whether manual calculations achieve the same results as what the system is generating.

Pre-Adoption Test Cycle

Many companies are anticipating that the implementation project will take them right up to the deadline, so building in a test period may seem impossible. However, even if you’re not ready to implement the standards until the last possible second, you should still consider building in a testing phase for your planned processes, policies, and controls. There will be many groups involved in the leasing program, and it may take time for everyone to learn to consistently follow the new policies. A testing phase will help you pinpoint weak spots and develop solutions before you implement. You don’t want to find out that one of your policies is not being consistently followed during your first post-implementation quarter close.

In Conclusion

At this point, the key for a successful and timely implementation is for organizations to do everything in their power to optimize and prioritize their approach to implementation. You don’t want to repeat the data collection or software selection process, and you certainly want to avoid issues with maintaining your lease data that could lead to restatements. Following these steps will help you overcome some of the most demanding and complex stages of the project so that your leasing program is ready to go by the effective date.

Colleen Tigges is VP of Global Solution Consulting at LeaseAccelerator.