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5 Crucial Tips as Lease Accounting Deadline Nears

Sponsored by Bloomberg Tax

Adopting the new lease accounting standard can be tricky. Here are 5 tips for managing the transition.

When founder and CEO George Azih took a client’s call earlier this year, he couldn’t have envisioned the nightmare that would unfold.

The client, who wanted to start implementing the new lease accounting guidance, which takes effect Jan. 1, was certain the company’s 1,700 leases were all operating leases, Atlanta-based Azih told Bloomberg Tax. The client therefore felt the adoption process would be quick and smooth. That didn’t happen.

“When we entered their leases in our system, we determined that 40 percent of their leases were actually finance leases, not operating leases,” Azih said.

A major undertaking to correct the error followed. “This was a huge headache for both external and internal auditors, plus the CFO, to discuss how to address it,” Azih said. “It was not a small deal.”

The new lease accounting rules require companies to report, for the first time, the full magnitude of the lease obligations they carry on their financial statements.

Like Azih’s client, companies when adopting the rules can assume they know more than they actually do about the leases they carry, thereby risking misstatements, accountants said.

Here are five tips accountants said can help executives avoid such pitfalls:

1. Project Management

Determine your team, both inside and outside of the company. The leases team should have a project manager plus representatives from accounting, internal audit, tax, investor relations, and treasury, said Marybeth Shamrock, a partner in KPMG LLP’s advisory services practice in Cleveland. “Ideally companies have just implemented revenue recognition, so they can use the same format that they did for revenue recognition” to prepare for adoption of the lease standard, she said.

2. Get the Technology

Select the system to use and quickly embark on adopting it. “There are still a lot of companies still trying to determine what technology they’re going to use,” Shamrock said.

3. Gather Inventory

The most time-consuming and difficult thing is identifying, locating, and ensuring all the leases are signed, accountants said. Companies shouldn’t underestimate the time needed to get that inventory identified in a central place.

4. Choose an Accounting Policy

Decide whether to use the package of exceptions the rules allow to ease implementation cost and complexity. The exceptions enable a company to avoid having to reassess aspects of the rules. For example, a company wouldn’t have to reassess expired or existing contracts to determine whether it’s a lease. If a company decides to utilize the exceptions, it has to apply them as a package, Azih said. Accountants should also be mindful of technical issues such as embedded leases to ensure they’re handling those issue correctly.

5. Work With Auditors

Work with auditors to ensure agreement about the company’s process and plan. Auditors want to be sure those working on it have expertise in technical accounting issues, project management, and gathering and categorizing the necessary data, said Peter Vinci, a CPA and consultant with Resources Global Professionals in North Carolina.

“If there are inconsequential—immaterial—errors, the auditors will pass on them as long as the end result is substantively correct,” he said.

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