With the new regulatory changes for lease accounting looming, it’s essential that finance organizations get ahead of the curve. Essentially, the new accounting standards stipulate that most leases must be reported on each company’s balance sheet. Compliance and accurate statutory reporting will require collecting, maintaining, tracking, and analyzing leases in specific new ways. All this may leave you wondering how – and how soon – you need to make changes to business as usual.
These new accounting standards recently announced by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) affect every IFRS and U.S.-GAAP reporting company renting real estate or leasing equipment. Large companies with big property portfolios are most affected, and they need to react quickly to prepare. The new leasing standards represent more than accounting changes. They force business process change, which means some level of impact on systems and technology.
How a purpose-built solution can help
Fortunately, solutions exist that can help optimize the portfolio of global assets and support regulatory compliance of these new accounting rules. The best solutions are capable of providing a single point of entry for collection, validating lease contract data, performing valuation calculations, and generating the financial postings derived from these calculations.
With these new standards, it’s important that the lease administrator, lease accountant, and fixed asset accountant can collaborate closely. They need access to the same lease record, with all calculations based on the terms and conditions of the abstracted lease, yet with separate authorizations to ensure a clear separation of duties.
In addition to capturing contract terms and conditions, a solution designed for this purpose will support real estate leasing processes such as managing critical dates, exercising renewal options, early terminations, rent escalations, and sales-based rent. Purpose-built solutions incorporate flexible, extendable forms to collect industry- or business-specific attributes, enabling users to stay ahead of the game. Periodic posting runs automatically generate all lease payments based on the terms of the current lease agreement, with real-time integration into the organization’s financial management software.
Lease accountants need to be able to evaluate the financial impact of each lease and ultimately generate all valuation postings required by the new leasing standards. They can take advantage of a solution that manages the postings for multiple lease accounting standards simultaneously, regardless of whether they’re using the general ledger account or parallel ledger methodology.
The importance of eliminating data silos
If your company uses spreadsheets or an alternative solution, information silos will naturally exist between lease administrators and accountants. Data becomes inconsistent over time, resulting in inaccurate valuations and misstated financials. You need a way to break down silos between these groups, ensuring transparent, consistent, and accurate results. With greater visibility into portfolio-wide lease data, you can improve your decision making through better understanding of all the associated legal, financial, and business implications of your leasing strategy.
What to do now?
Even though the new leasing standards are not effective until December 2018 for U.S. GAAP and January 2019 for IFRS, you can choose to be early adopters and begin reporting in January 2017. Whether you choose to be an early adopter or comply by the deadlines, there are certain things you can do today to prepare.
- If you currently have a solution in place for real estate management, consider implementing enhancements supporting these new mandates as soon as they are available to begin evaluating the impacts to your financial statements. Even if you do not intend to be an early adopter, loading in the leases and analyzing the results will pay big dividends in the future.
- Consider implementing a purpose-built solution into your current financial management solutions for a fully integrated leasing solution. Then, begin abstracting existing lease agreements and ensure that the abstracted lease terms and conditions are correct. For most organizations, this will be the most time-consuming portion of the lease compliance project. All calculations are dependent on accurate lease information. Any inaccuracy in probable end dates and payment amounts, for example, will have an impact on the posted valuations.