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With the new lease accounting standard set to take effect in January 2020 for calendar year-end non-public entities, your business should adopt a centralized process for collecting, analyzing and potentially recording leases on the company’s financial statements sooner than later. Although this will be a long, intimidating task for most businesses, it will ultimately help streamline your lease management system by delivering a methodology to improve lease accounting technologies and processes.
Here are tips to start mapping out your business’s strategy for implementing the new lease accounting standard so you can stay ahead of the curve.
Essentially, the new standard requires entities to recognize most leases on their balance sheet as a right-of-use asset and a corresponding lease liability. Most existing arrangements that currently are reported as leases on the balance sheet will continue to be reported in this manner under the new standard. However, the new guidance is expected to encompass many more types of arrangements that aren’t reported as leases under current practice. The new standard will affect more than just the face of your financial statements, it will also require new quantitative and qualitative disclosures. Take the time to make sure you understand all the technical implications of the new standard. Call on the outside expertise of your CPA. They can supplement technical expertise you may be lacking internally and help you in the implementation process along the way.
Although no one person can go at this alone, select a lease accounting steward with a deep technical understanding of the new standard to help lead the charge. Backing this person should be a cross-functional steering committee that includes management, accounting, procurement, legal and information technology expertise to help develop a go-forward leasing strategy and disseminate the information across the organization.
Establish a threshold and a policy for leased assets. Get your CPA involved early to help you navigate this daunting process. Be sure to document any policy decisions and the rationale behind them, which will ultimately support your decision process with your external auditors.
In order to implement the new standard, you need to understand what you’re working with. Take an inventory of all your leases. This may not be as simple as it sounds. It can be a daunting task, given that the number and locations of leases are often mysteries. Discovering and collecting such data may be a challenge because leases exist in an array of formats across a broad landscape of back-office systems and data types.
Taking it one step further, an evaluation of agreements against the multi-part definition of a lease is required to determine all arrangements falling within the scope of the new lease standard. Don’t forget to take note of embedded leases in service agreements. Often complex, these agreements require close scrutiny. Separation of such agreements is required under the new standard unless the lessee makes an accounting policy election not to separate lease components from non-lease components.
Today, many organizations rely on Excel worksheets to manage their leases, but the complexity of balance sheet entries, disclosures and calculations required for compliance will now require much more advanced digital capabilities. Explore your software options. Make a decision that best fits the requirement of your company and will be easy to add new leases to. You’ll need to factor in the time it will take to design, build and implement the solution.
Developing a full lease accounting solution will be a project that will likely span several quarters, if not years. However, don’t wait until the solution is in place. Run a parallel process putting into place the foundation of accounting policies and controls to help seamlessly integrate current leasing activity into the final solution.
The new lease accounting standard is a significant change that touches the entire organization, not just accounting. Taking the time to centralize leasing activities now will not only help bring your business into compliance more smoothly when the time comes, but provide a strategic opportunity to streamline processes.
For assistance in mapping out your business’s lease accounting implementation strategy, contact Doeren Mayhew’s CPAs today.
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