Chances are you’ve already tangled with the ASC 842/IFRS 16 changes in standards determining how organizations should be accounting for leases on the balance sheet. The effective date for implementing these standards for public companies started for fiscal years beginning after Dec. 15, 2018. But that was just the first salvo. After a couple of delays, private companies were subject to the same new standard beginning with fiscal years starting after Dec. 15, 2021. And that’s now!
Many of you were still struggling with understanding these new standards and working to get them implemented with your public company clients, just to be faced with the somewhat herculean task of also applying them to your other, private company, clients.
Fortunately, as with many areas of accounting, lease accounting software has adapted to the new standards. And while changing the way that you account for your clients’ leases will probably never be painless, the right software can ease that pain and help ensure a less problematic implementation.
Why, oh why, me?
The Financial Accounting Standards Board didn’t adopt the new standards just to create more work for you and more complexity for your clients. The simple fact is that there is an increasing movement to greater visibility, especially in financial areas. The intent is to make it easier for investors, government agencies, and other financial statement users to more easily see a company’s exposure to risk and its true financial position, as well as to allow easier comparisons between companies. The new ASC 842 standards also closely align with the IFRS 16 international lease accounting standard, meaning that there’s somewhat less complexity involved with financial statement preparation for multinational companies.
Determining whether a particular lease should be classified as an operating lease or finance lease is a useful function of most lease accounting applications. It can also help move lease accounting away from the Excel spreadsheets many clients still use to perform this accounting operation.
To help determine whether lease accounting software is a good fit for your clients, we turned to a virtual panel of vendors of this class of software.
Big, small, and everything else
One item we were curious about was how applicable lease accounting software was to companies of different sizes.
“The new lease accounting rules under ASC 842 impact any company with operating leases,” Melissa Sacks, director at LeaseQuery, told us. “The standard impacts both large and small organizations across all industries by requiring entities to record lease liabilities and related right-of-use assets for the vast majority of operating leases. The complexities of ASC 842 make the utilization of a lease accounting software solution a necessity for most organizations who simply don’t have the resources to track individual leases in Excel and maintain these schedules each month. Accounting software solutions simplify complexities by taking all the hard work out of implementing ASC 842 and tracking leases on a go-forward basis. Software solutions will generate amortization schedules, journal entries and reports with the click of a button. In the past, organizations could spend days gathering all this information from around the organization.”
Ane Ohm, a CPA and co-founder and CEO of LeaseCrunch, doesn’t feel that size is necessarily a factor: “As long as the economics make sense, organizations that follow GAAP and have a single lease can benefit from lease accounting software. This is because the new lease accounting standard calculations are complex, particularly for footnote disclosures and lease revisions.”
The number and complexity of an organization’s leases, and its available internal resources, play a big part in a firm recommending that a client implement a lease accounting application.
Joe Fitzgerald, senior vice president of lease market strategy at Visual Lease Inc., noted that publicly traded companies may have more of a global footprint: “So, once you start to get a lot of decentralized locations, then you’ve got a lot of folks. We’ve got customers that have well over a hundred users of the system. And the reason is that they’re around the globe. So that’s another level of complexity, that it’s a little hard to do it on a static Excel spreadsheet.”
Fitzgerald continued, “Another thing that’s interesting is private companies, on average, tend to be less resourced. When I was dealing with the leasing standard back as early as 2014, you’d go to a large public company, and they had somebody internally who was only focused on lease accounting. You go to a private company, and you don’t have that. You’ll find that the level of the individual you’re talking to will go higher in the organization, in terms of title, like your CMO or controllers, even some CFOs.”
Not for everyone?
And when we asked whether there were client companies that might not be a good fit for lease accounting software, the answers we received were largely in favor of the application. And while that’s pretty much to be expected from vendors selling the software, they backed it up with some excellent reasons.
Yet we did get some exceptions where a client might not be a good fit. “Lease accounting software is not a substitute for a good lease accountant,” said John Meedzan, managing partner of iLease Management. “The person entering the data in a lease accounting software must understand the lease accounting requirements and interpret lease contracts correctly. Leases that require frequent reassessments of discount rates, lease terms, lease payments and lease classification are not good candidates for such software. Complex lease contracts require a bespoke Excel-based solution.”
And LeaseCrunch’s Ohm pointed out that in some circumstances, there might not be a need to comply with the new standard at all.
“While many organizations are affected by the new lease standard, it doesn’t apply to everyone. If a smaller business operates on a cash basis, they won’t need to adopt the new lease standard even if they have leases,” she said. “There are also organizations with leases where the dollar values are immaterial to the financial statements. Additionally, an organization’s leases may all end before 12 months — including reasonably certain renewals. After confirming with their accounting firm, they might be able to avoid implementing the new lease standard.”
At the same time, Ohm pointed out, “Otherwise, this new lease standard is more pervasive than most. It is applicable to all industries and types of leases where a physical asset is involved. One of the most common questions I hear is, ‘Wait, even my leased vehicles count?’ Yes. And your photocopiers, ice machines and dedicated data lines.”
Fitzgerald is another who noted that not every business might need lease accounting software: “I would say it’s the complexity of the portfolio. If you do have leases that are rather static, where you do ‘set it and forget it,’ and you’ve got a small portfolio of, say, 25 or less, I would say then you don’t necessarily need anything beyond Excel.”
Yet lease accounting software can be a definite benefit to many companies, whether they’re in the public sector or the private sector.
LeaseQuery’s Sacks points out some pluses of adopting a vertical software approach to compliance: “We believe that accounting software solutions are really a must for all businesses with leases, which in our experience is nearly every company out there. There’s a definite value-add when using software to account for your lease portfolio. Software solutions allow users to store all leases and lease documents in one central location that can be accessed by users across business entities and locations. Software solutions will also ensure the balances associated with your lease portfolio are accurate. Lease accounting software solutions can handle not only the Day One accounting for ASC 842 (recording the opening lease liability and right of use asset) but also Day Two lease accounting activities like modifications, terminations and impairments. Having all of your leases in one place also allows for seamless reporting. Most solutions provide standard out-of-the-box reports to meet disclosure requirements under the new guidance, in addition to the ability to create unlimited custom reports to meet the entity’s specific management reporting needs.”
Finally, Meedzan said, “A company with more than 10 active leases must consider a lease accounting solution. The new accounting standard requires more sophisticated financial calculations and detailed monitoring and tracking of leases. Companies will find it extremely challenging to use spreadsheets for lease accounting because of the limitations of spreadsheets. Lack of ability to track changes, converting complex ASC 842 requirements into Excel formulas is challenging and error-prone, aggregating and summarizing data across spreadsheets is difficult, interfacing with journal entry software, and version control is difficult with spreadsheets.”
Even an accountant can do it!
One major concern when considering adding another application to a client’s toolbox is the difficulty, cost and time needed to get the new application up and running. Pretty much each of our virtual panel members took great pains to make it clear that implementation of lease accounting software, as with any major application, is not a trivial task. We asked what the accountant and their clients can expect.
“Most public companies wished they had started sooner on ASC 842 adoption, including implementing new lease accounting software, when the deadline was Q1 2019. While the time frame on just software may be six to 12 weeks, there is a wide variation due to often unforeseen complexities in data abstraction, portfolio operations, system integrations, policy-setting and other considerations. The bottom line is don’t delay,” advised Matt Waters, a CPA and director of lease accounting at CoStar Real Estate Manager. “The implementation process can be managed entirely by the business’ personnel, managed by the software company, or managed by an accounting firm with knowledge of the software. The implementation model chosen, along with the size and complexity of the lease portfolio, will determine the time required. The number of automatic integrations that need to be configured also plays into the timeframe. Examples of automatic integrations include feeds from the lease accounting software to the ERP system or to an account reconciliation software. These integrations may take more time to set up initially, but the business’ accounting team will enjoy the benefits every month going forward as time is saved and errors are avoided.”
Visual Lease’s Fitzgerald notes that you have to keep all of the steps in mind. One important piece of the implementation process is data.
“The customer’s got to go around, get all their leases together, come up with a plan to do abstraction, and to do what I’ll call an enriching of the data, because not all the data that you need for lease accounting is in the contracts,” he explained. “Folks realize that once they’re in that there’s judgments and things they need to make. And then you’ve got to get that in a condition that it then can be migrated to the solution that you choose. Finally, to do that, you’ve got to test it.”
And Ohm pointed out that not every implementation is a horror story in waiting: “The time to implement software is dependent on the software selected. Some software requires weeks of implementation time, while others can be up and running in hours. The length of time is also impacted by the size of an organization’s lease portfolio. With 20 or fewer leases and an easy-to-use software, an organization can be ready in a day or two. The exact time depends more on a team’s ability to abstract the few relevant data elements from a lease document.”
Smoothing the bumps
Finally, we asked our panel what steps accountants and their clients could take to mitigate the problems trying to implement a complex application. One speed bump that Fitzgerald brought up is having the right people for the right steps in the implementation process. The specific example he gave is having interns who have no knowledge of the application or accounting doing data entry. That’s just begging for a substantial amount of data cleanup before the application is up and running.
And LeaseQuery’s Sacks noted, “Companies are sometimes so focused on these implementation challenges that Day Two accounting considerations are an afterthought. Organizations should start thinking about everything they need their software solution to do for them after adoption. Things like notifications for lease renewals or rent increases, access controls, and records of all lease changes are items accounting teams should consider. The best software solutions can handle not only the implementation of ASC 842 but the ongoing accounting and administration of leases.”
Preparation is also a large part of having things go smoothly. LeaseCrunch’s Ohm lists a viable approach: “An accounting firm can provide immediate value by helping clients understand lease accounting policy decisions before they start implementing the new standard. Secondly, accounting firms should encourage their clients to understand the financial statement impact of the new lease standard before it must be included. If adding leases onto the balance sheet adversely affects debt covenants, clients can work with their bank to modify the covenant calculations before they are out of compliance.”
She continued, “Third, accounting firms can provide organizations with the confidence and tools to start early on implementation. Most of the time, organizations adopt new accounting standards at the last minute possible. For this standard, starting early provides more time to locate lease documents, communicate impact with financial statement users, and access resources for lease accounting questions. Waiting to implement will likely result in more expense and time spent.”
CoStar’s Waters also pointed out, “The most common problem is that businesses focus too intently on the initial compliance exercise and end up with a process and software solution that does not support day-to-day leasing operations. Lease accounting is an ongoing exercise, as leases change frequently.”
The ASC 842 standards don’t have to be an overwhelming problem. The right software and right preparation will go a long way to helping your clients meet these new challenges. AT
