Part 6 in the Continuous Accounting Series.
Most companies use leases for equipment and real estate assets in some part of their operations or business activities. Currently, operating leases for equipment and real estate are reported off the balance sheet and are disclosed in the notes of the financial statements. Today’s current lease accounting regulations have been stable for decades, but that is about to change. Organizations worldwide will need to start complying with new regulations for lease accounting proposed by the FASB and the IASB called ASC 842 and IFRS 16.
SAP has been analyzing this topic since 2010 and has interviewed hundreds of customers on the new lease accounting standards. We have found deep business process differences between real property leases and equipment leases, particularly in availability of software that handles both sets of requirements in the depth that is needed by enterprises today.
Overview of the timing and solution mapping for the new lease accounting regulations
We have also found that many companies already have software to assist them with managing real estate leases, but very few companies have software that assists them with equipment leases. So, with the new regulations, organizations will be required to capitalize many of these operating leases for equipment and record them on their balance sheets as assets and obligations. With these major changes to the accounting standards, the burning question is: What can you do now to help get ready for the new accounting regulations for equipment leases?
To ensure that enterprises have the information ready and organized to meet and assist compliance for equipment leases, organizations need to start considering how technology can help them prepare. So, what should they look for in software to ensure they meet the new regulations for equipment leases and also benefit from additional cost savings that can be realized with improved lease administration processes for equipment?
The right solution that goes beyond just regulatory compliance should provide your organization with the following:
1. Unified database for all equipment lease operations
Organizations should aim to build a comprehensive equipment lease portfolio by centralizing lease data in a single repository. This approach provides excellent access, visibility, and traceability regarding critical issues, such as lease composition, key lifecycle dates, the value of leased equipment assets, and responsible organizational units.
2. Collaboration during the process of data collection
The right technology should offer the entire organization (not just a single user) the ability to track changes and understand who made them. Collaboration tools are essential to empower all stakeholders to easily validate contracts for leased equipment assets and better understand all the associated legal, financial, and business implications.
Collaboration across the enterprise for accurate and validated equipment lease data with software support
3. Strategic insight for sound decision making
Executives need to be able to analyze the financial implications on the business of current and proposed lease accounting regulations for equipment in order to make more informed decisions. Therefore, it’s important to use a tool that can provide rich analytics and visibility into the portfolio composition by different dimensions and provide “what-if” scenario analysis to identify opportunities to efficiently manage leases.
4. User-friendly interface with minimum training required
The new accounting regulations for equipment leases are approaching fast, and many compliance processes are very time consuming. With this in mind, your accounting team needs to be able to hit the ground running with a solution that requires a minimum of training. It’s very important to look for a solution that allows for efficient management of lease administration for equipment in a user-friendly, visual format that is easy to learn and use.
5. A solution that adapts to your business
Integration with your current systems and flexibility to address your specific business are key technical requirements for the right solution. The solution should also enable a smooth transition to the new required processes and controls by the accounting and finance departments. The solution should allow you to abstract equipment leases and perform the related accounting valuations across multiple accounting standards if necessary.