Selecting the Right Tool to Comply with the New Lease Accounting Standards

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If you haven’t already implemented the new lease accounting standards under FASB ASC Topic 842 or GASB Statement 87, the deadline is quickly approaching. 

  • FASB ASC Topic 842: effective for non-public entities for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. For calendar year companies, that means the guidance is effective January 1, 2022.
  • GASB Statement 87: effective for fiscal years beginning after June 15, 2021 and all reporting periods thereafter. For entities with June 30 fiscal year-ends, that means the guidance is effective July 1, 2021.

Policies and Procedure concept. document folders and organizers, white book shelfBy now, you’re likely familiar with the new lease accounting requirements that require lessees to recognize a lease liability and corresponding right of use (ROU) asset on the balance sheet for virtually all lease contracts. What you may not yet be familiar with is the potential complexities in preparing and maintaining lease calculations and accumulating information needed for quantitative lease disclosures.

Considering your entity’s lease portfolio, how do you select a compliance solution that is right for your entity?

Selecting the right compliance solution is a critical early step in implementing the new lease accounting standards. Choosing a solution that does not have all the features you need will leave you frustrated and spending more time trying to account for its shortcomings. And deciding on an over-featured solution may result in excessive expenditures for unused performance. Here are a few questions you should consider in making this decision:

1. Does the solution ensure compliance with the applicable standard(s)?

While there are a lot of similarities between FASB ASC Topic 842, GASB Statement 87 and IFRS 16, there are also a number of differences that require unique implementation considerations. Additionally, some companies may need to comply with both FASB ASC Topic 842 and IFRS 16. It is also important to understand the numerous inputs that can affect lease classification and measurement to ensure the solution is capable of handling each appropriately.

2. Does the solution support your company’s policy elections?

The standards require several policy elections and allow for the adoption of multiple practical expedients and transition methods. You may need a solution that assists with implementing those elections, such as whether to separate lease and nonlease components, determination of lease classification and your selected transition method.

3. Does the solution support your company’s accounting periods?

Companies with less common accounting periods, such as 4-4-5, 52-53-week or 13 periods, may find solutions do not accommodate their accounting periods. While you may be able to use the outputs of any particular solution to approximate your periodic journal entries, you should consider the time and effort to do so.

4. Can the solution handle lease remeasurements and modifications?

Under certain circumstances, a lessee must remeasure the lease liability and ROU asset. This may result from a change in assumptions made at lease commencement about renewal, termination or purchase options and residual value guarantees. You may also need to perform lease remeasurements as a result of lease modifications. 

5. Does the solution support the import of lease terms?

Implementation and maintenance may be made easier by the ability to import lease terms into the software, especially for larger lease portfolios. Some solutions take this further by using artificial intelligence to “read” lease contracts and extract pertinent lease terms.

6. Does the solution prepare periodic journal entries?

If the solution is not integrated with your accounting software, you will want it to prepare and summarize the required periodic journal entries to post in your general ledger.

7. Does the solution prepare quantitative footnote disclosures?

The new lease standards require extensive quantitative disclosures. The solution you choose should automate the preparation of these disclosures based on all leases entered.

8. Does it integrate with your accounting system?

ERP integration is an important consideration for many companies. Many solutions have ERP integration capabilities, but they vary by product. Others are native to particular ERPs. For example, technology solutions professionals at Sikich identify recommended solutions for use with Dynamics 365 Business Central and NetSuite.

9. Does the solution allow you to attach or organize related lease contract documents?

Reviewing, approving and maintaining lease calculations is easier if the related lease contracts are readily available and married to the entered lease terms.

10. How mature is the solution?

Some solutions were well established to provide lease accounting solutions under prior standards and modified their tools for compliance with the new standards. Many more solutions emerged in recent years, due to the new accounting standards. Obtaining information about how long the solution has been available, how many clients it has and the industries it serves help make an informed selection.

11. Is a SOC report available?

You’ll want to know that your data is secure and the outputs of the solution are reliable. A SOC report can help provide comfort in these areas.

12. How much will it cost?

Software vendors have a variety of pricing models. Some require one-time set up fees in addition to ongoing fees. Most offer tiered pricing models with annual costs dependent on the number of leases. It’s important to note that many use a SaaS (software as a service) model, which requires recurring licensing fees even if your lease portfolio does not change.

If that wasn’t enough, there are many other features you may also want to consider, such as:

  • User prompts and guides to facilitate data entry and decision making
  • Payment schedule entry (calculated based on inputs or required manual entry)
  • Audit trail to track changes made by user
  • Internal controls (e.g. segregation of duties for recordkeeping and review/approval)
  • Critical date notifications (e.g. upcoming payment dates, termination dates, etc.)
  • Duplicate lease detection
  • Integrated lease accounting and lease administration
  • Accounting by reporting unit (division, branch, fund, program, etc.)
  • Leases with non-consecutive rental periods
  • Multi-currency accounting
  • Ability to handle ROU impairment
  • Depreciation of finance lease assets (methods, depreciation over economic life versus lease term)

Our team developed an Excel-based solution to meet the needs of many organizations adopting the guidance under ASC Topic 842. Our accounting professionals are available to consult with you on your organization’s particular requirements and help identify a solution to meet those needs.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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