Digital Technology
Aug 13, 2018

It's not too late for lease accounting compliance

Like a replay of Y2K, many companies still lack clarity about what needs to be done ahead of the new lease accounting standards. Almost all organizations have partnered with an expert firm on their compliance journeys. But there's a big gap between theoretical knowledge and the expertise to put new processes into practice.

With the deadline fast approaching, worries are deepening as organizations struggle to close that gap. But there's still time to make sure you achieve smooth lease accounting compliance. Here are eight steps you can take. 

1. Reduce the noise

Set your policies first to reduce any unnecessary noise in the compliance process. Without clear policies in place before you start collecting data, you're likely to collect too much, not enough, or the wrong information. Early adopters have used this to their advantage. For example, a large banking company changed its definition of lease assets from 'identifiable assets' to 'identifiable non-substitutable assets,' which cut down how much data it needed to collect.

2. Recognize that process design is key

As organizations start implementing new tools and policies, they quickly realize that designing effective processes is critical for two reasons:

  1. Most technology solutions aren't fully mature in year one, so teams are still highly dependent on spreadsheets and manual workarounds
  2. Historical data collection and upload are easy, but setting regular practices requires change management and fixes upstream 

3. Build on similar experiences

Because there are no established practices for complying with the new lease accounting standards, early adopters have drawn parallels to the work their teams have done with fixed assets. One manufacturing major, for example, increased its lease asset limit from $5,000 to $7,500. The idea came from the fact that its asset capitalization limit is also $7,500 – and yet the increase had no material impact on the balance sheet. Similarly, the process to track asset transfer, sale, and renewal has now been aligned to what the company does with fixed assets.

4. Fix data at source and don't lose track

Effective ongoing data collection requires significant changes upstream. To prepare, companies should follow one fundamental rule: While responsibility for data collection and capture lies with the asset owners and business teams, nothing should be processed until it has been approved by finance.

Two key functions – procurement and real estate management – will require significant upskilling and other changes to establish the right responsibility split without losing time and information. For example, many organizations are centralizing lease purchase-order (PO) creation within lease centers of excellence (CoE) to make sure POs are created correctly. This is critical to get the right accounting and simpler reconciliation of clearing accounts.

As your leasing portfolio will change over the lifecycle of leases, you need full visibility into:

  • New leases signed by business units globally
  • Equipment lease mid-term and end dates
  • Decisions to renew, buyout, or return assets, and any damage to, movement of, or changes in variable factors for the assets

To keep your lease accounting system up to date, you need robust processes that can capture all changes and automation through dynamic workflow to operationalize your processes.

5. Establish templates and checklists

No matter how rudimentary templates and checklist sound, there's no substitute for them. It's vital to maintain a consistent approach to all leasing-related matters.

For example, a manufacturing giant uses a lease analysis workbook – a template for capturing all lease-related information needed for accounting. This workbook is being updated to accommodate new data fields so it becomes a single source of truth for all new, renewed, and modified leases.

6. Take a hybrid project approach

There are many project management approaches, from waterfall to agile, but there isn't one that will meet all your needs. That's why, with multiple work streams and deadline pressures, most organizations take a hybrid approach, one that allows parallel processing – from IT to process design and policy components – with well-defined intersection points.

7. Get in control to avoid damage control

One of the key elements to getting lease processes ready for the Financial Accounting Standards Board, the International Accounting Standards Board, and Sarbanes-Oxley compliance is to set up a controlled environment. You need to apply your controls systematically and consistently. This includes user access controls, workflow, automated audit-trail documentation, and processes, as well as periodic verification and attestation, sign reconciliation, reviews, and checklists.

About the author

Vivek Saxena

Vivek Saxena

SVP and Service Line Leader, Record to Report

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