New accounting standards under FASB ASC 842 and IFRS 16 require organizations to record leases on their balance sheets. We’ve helped public companies implement these standards, and now it’s time for private companies to follow suit before the newly revised Jan.1, 2021, deadline.
Crowe Senior Manager and CPA Dan Edwards has helped many of our clients adjust to these new guidelines. Here are 10 lessons that he says private companies will benefit from.
Our experiences with public companies suggest the earlier a company starts implementation, the smoother and less costly the entire process is.
For private companies working toward the extended Jan. 1, 2021 deadline, it’s not too late to start working toward compliance. An automation tool such as the Crowe Lease Accounting Optimizer can save companies time when it comes to calculating values and performing all the necessary entries.
The FASB’s leasing standards require private companies to record on their balance sheets leases embedded into contracts. As a private business owner, this means asking yourself how many assets your business owns and how many assets does it lease?
Many companies underestimate the effort it takes to collect lease information and organize it in a uniform format. You might be surprised by the number of things you lease – from coffee makers and copy machines to building space and cars. The problem companies are having is that they’re not tracking smaller assets (like printers, for example) because the dollar amount isn’t as significant as other assets such as property. The value of a handful or more of smaller, seemingly insignificant items adds up, however. And tracking these and other leased items takes time.
Lease contracts aren’t one size fits all. Contracts for car leases might be straightforward while land, equipment, and office leases can be rife with complexity. In order for a software like Lease Accounting Optimizer to formalize and standardize the requirements within these leases, companies need to have the right information, which involves going back and reviewing the terms of every lease. Don’t forget to consider possible balloon payments.
The new lease accounting standards add more requirements for your accounting team. This means budgeting for additional accounting staff members who can gather lease data and interact with other departments and branch offices. How far you stretch your budget depends on your organization. For example, if your company has 20 office leases and each is a 20-year lease, one accountant might suffice. But, if you operate a business that adds hundreds of new leases every month, you’re probably going to have to bring on a lease clerk and maybe even another accountant.
Private companies need to make sure their legal, purchasing, IT, real estate, and other departments are engaged with accounting during the transition process. This means accounting is going to have to reach out to each department and ask, “What leases are you aware of that we don’t know about?” This outreach can help form a more comprehensive understanding of the company’s leases. Many companies now have siloed departments with individual databases and procedures. This disconnect can be a challenge, but our lease accounting software can help keep each department on the same page.
The conversion to new lease accounting standards requires change for all departments and divisions involved. Departments such as IT likely are unaware of the standard change. It’s important for your accounting team to provide regular updates on new processes and requirements to ensure other departments are in the loop.
Many companies have approached the implementation of the new standards as a task rather than a project. Why? They didn’t realize the full depth of the process. You can avoid this same mistake by asking yourself these questions ahead of your implementation efforts:
Once you have the answers to these questions, you can start to implement a new system. The accounting department can serve as the project sponsor and central point of contact as it leads the conversion effort.
Nearly every company finds some unexpected twists as they delve into implementation. The biggest surprise most companies deal with is the number of leases they have. For example, one client in the transportation industry who leases equipment believed it only had one lease for several hundreds of units. But in reality, it had several hundred leases because each piece of equipment needed to be tracked separately. Another company had verbal agreement leases, which still had to be catalogued for the new standard.
The approach your organization adopts during your implementation process might have a significant impact on your balance sheet, so keep your auditors in the loop as much as possible. While auditors can’t give you management advice, you can share information on how your company will handle lease accounting going forward and the technology solution you choose. You can also allow your auditors to sit in on presentations or ask questions regarding lease accounting.
Acclimating your company to the new lease accounting standards means choosing a software that streamlines data collection and can be easily embedded in existing company systems such as Microsoft Dynamics AX 2012 and NetSuite platforms. Our software, Crowe Lease Accounting Optimizer, allows you to ease into the implementation process by: