Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles GAAP , the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.
However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet— the new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.
Thus, adding the value of the entire leased portfolio can be a big change and can also make a huge impact on the outcome of the financial reports. This also means that the risks related to the poor lease management and lease decisions are magnified. And hence, financial leaders must carefully analyze and manage leasing decisions, expenses and administration practices. Traditionally, lease negotiation, accounting, and administration were done in silos with little to not any coordination between the teams that handled each task.
This led to scattered data, inconsistent lease decisions, and often, pay excessively for lease expenses owing to the lack of audit capabilities and centralized records. Effective lease management involves cross-functional collaboration and centralized access to lease management tools and lease data.
In order to set the teams up for effective lease management, choosing a software platform such as Visual Lease will enable the organization to centralize ALL data related to lease contracts.
Besides, it will provides tools for automating auditing expenses and lease administration tasks. When the whole team managing leased assets is making use of the same system to update schedule payments, lease data, and create accounting journal entries, all team members are always working with the most current data. With technology and centralized lease management tools in place, an organization can now analyze the lease data and discover which leases are working fine and which are costing the organization more money than realized.
Using those insights can help in determining how the organization wants to standardize leasing decisions. For financial leaders, it is the best practice to work with lease administrators, negotiators, and accountants to comprehend current practices and establish cost-effective leasing policies.
This also includes processing new leases, handling lease terminations, and documenting lease changes. Choosing software that automates lease re-measurement and modification is a smart way to minimize the burden on the accounting team. The complexity of financial reporting has increased due to the addition of leases to the balance sheet. This means that more oversight is needed to guarantee accounting accuracy.
Besides, process validation and internal monitoring are required to ensure that all lease management procedures and policies are being followed. There are usual suspects, of course, like real estate lease contracts, which are relatively easy to identify and generally are already tracked.
But an entity's contracts aren't always labeled as "leases. If a contract includes the right to use an asset that meets the definition of a lease, it should be tracked and accounted for as part of adopting the new lease standard. This is true even if one elects the package of practical expedients, which includes the ability to not reassess existing contracts.
As has been said many times, the package of practical expedients does not grandfather errors. For example, if a contract was not evaluated under FASB ASC Topic the legacy lease guidance but should have been, or was evaluated but an incorrect conclusion was made, the election of the package does not grandfather those errors.
If the entity wants to benefit from the package, it would have to reassess those contracts under Topic first. Entities can also be sure that their auditors will focus on completeness in their audit testing since liability recognition is now the focus. Accordingly, private companies should not halt their lease implementation efforts.
They should continue assessing whether their starting point — that is, their lease population — is complete. While other ongoing significant projects may be underway, such as adoption of the new revenue standard, continuing to work on the completeness assessment of the lease population will be a critical, likely time-consuming first step that will be a key differentiator for a successful and seamless adoption.
This won't simply be an accounting department exercise — it may involve people from various departments across the company, including procurement, treasury, IT, and legal, and potentially from foreign locations.
Another time-consuming step toward implementation involves inputting the lease data so that lease assets and liabilities are accurately calculated and reported in the financial statements after adoption of the new standard.
As previously noted, most companies have found that they need a software solution in order to manage compliance with the new lease standard.
Use of manual processes such as Excel spreadsheets will generally be laborious and inefficient. Software solutions can drive effectiveness and efficiency in both initial implementation and continued application of the lease standard.
However, lease software can include up to fields to input per lease so that each is accurately reported and disclosed. Multiply that by the number of leases identified, and it becomes clear that significant time is needed simply for lease data input. To that effect, an entity may want to explore artificial intelligence capabilities to find the right balance between manual efforts and automation.
With the new effective dates, a calendar-year-end private company would be required to adopt the new lease standard on Jan. Because financial statements won't be issued until sometime in , it may be tempting to assume that private companies have even more time to adopt. However, recognizing leases on the balance sheet at adoption is one thing; remaining compliant going forward is another. The calendar-year-end private company described above will be required to recognize its leases on the balance sheet on Jan.
This means that starting on Jan. Businesses are not static, evolving over time to address their customers' needs and changes in business environments and to remain competitive and operate efficiently. Accordingly, it's likely that an entity's plans about leasing a specific asset will change over time, resulting in modifications to existing leases, changes in plans about complementary leased assets, decisions to abandon a leased asset before the end of its lease term, decisions to sublease an asset — the list goes on.
All these events will require accounting attention, and many public companies are currently spending significant time to comply with those requirements. If a private company does not address those events as they occur, it could become quickly challenging to catch up. Entities, even private companies, will need to implement systems and processes to not only recognize new leases on the balance sheet, but also to capture changes requiring remeasurement of existing leases in a timely manner.
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