The effective dates for Accounting Standards Codification (ASC) Subject 842 and Government Accounting Standards Board (GASB) Statement No. 87 have arrived, and organizations across all industries need to develop and implement implementation of compliance plans for adoption and beyond.
There “Global Lease Accounting Survey 2022includes responses from US private and public organizations. It explains how they meet US and international accounting requirements, the processes they use, and the challenges they have encountered and expect to encounter after implementation.
US public companies and international companies applying ASC 842 and International Financial Reporting Standards (IFRS) 16 have already adopted the standards, but most private companies have not. There is no “one size fits all” approach, but private companies can apply the lessons learned from public companies.
“When the public companies started their implementation, the guidelines were just coming out and there were no mature lease accounting systems or processes in place, but three years later the processes are optimized and the systems are more mature,” said PJ Alper, general manager and managed. service manager at EY. “Time to implementation has been shortened because there are skilled consultants, role models, and thought leadership from the industry.”
However, Alper notes that the challenges are still there for both public and private companies.
Status of implementation and integration
Among US private companies responding to the survey, 20% are beginning to implement lease accounting, while 32% have adopted it early, eight times more than last year.
Decision-making about leases is neither centralized nor automated for most of the 37% of respondents with more than 250 leases, the survey notes.
Surprisingly, 38% of respondents continue to use spreadsheets for lease accounting, despite the manual effort and lack of an audit trail.
“We have learned over time that for companies with more than ten leases, spreadsheets are not a path they should choose as they are difficult to manage, lack the required controls and are very risky. “said Janet Sifers, vice president of product marketing at LeaseAccelerator.
“Given the complexity of accounting rules, we recommend using one system from a controls and accuracy perspective for public or private companies that have more than 10 to 20 leases,” Alper agreed.
For 48% of respondents, lease accounting is not fully integrated with the monthly close process and other systems, leading to missed opportunities. Inefficient processes can increase the potential for errors, extra work, and higher risks.
“We are currently seeing a trend in the market where public companies are refining, optimizing or changing systems,” Alper said. “Since 2017, technology has advanced and many companies learn that selected systems did not have the right functionality and are migrating to new systems or being forced to change due to system retirements.”
She noted that there are several technologies available, some specific to industry or lease type, and companies should evaluate which one is right for them based on the complexity of their lease portfolio and planning system. business resources.
The top three audit challenges identified in the survey were completeness of the lease population (32%), recording ongoing out-of-period adjustments (30%), and capturing leases in a timely manner (28%) .
“Before ASC 842, everything was done manually and rental documents were in people’s desk drawers, so it’s hard to find them all and centralize the process. We suggest that our clients educate non-accountants in their organizations who enter into these contracts about what a “lease” is for accounting purposes, so they know what disclosures to provide. »
PJ Alper, Managing Director and Head of Managed Services, EY
Completeness and identification of agreements that are or contain a lease for accounting purposes is an area where EY frequently receives requests for assistance from private companies, Alper said.
“Before ASC 842, everything was done manually and rental documents were in people’s desk drawers, so it’s hard to find them all and centralize the process,” Alper said. “We suggest our clients educate non-accountants in their organizations who enter into these contracts about what a ‘lease’ is for accounting purposes, so they know what disclosures to provide.”
“It is normal for companies to make out-of-period implementation adjustments, which in our experience are mostly data-related or reporting delays. As of 2017, companies have done their best to collect lease data and make it materially accurate. But incomplete data and normal human error when implementing new guidelines required adjustments.
Sifers added: “We have found companies with a decentralized leasing model, particularly with equipment leases, are likely to find that they have a decommissioned asset where something has happened to it over a period of time. precedent which is not discovered until after closing.”
After adoption, public companies have ongoing challenges in complying with accounting requirements over the term of all leases, as well as improving internal controls and processes. Survey respondents noted that the integration of lease accounting and governance lags behind other finance functions.
Key internal control challenges in the survey results included capturing all leases in a timely manner and reconciling lease terms with the leasing system, validating completeness of the lease population at over time and the management of lease change events (for example, modifications, adjustments and write-downs).
Staff issues, including team fatigue and staff turnover, affect the implementation of the lease. Alper noted that the “big resignation” over Covid-19 has led to a lack of resources with the right knowledge.
Only 41% of respondents had a dedicated lease accounting team (35% have three to five full-time equivalents), and 24% said the team was tired. For US private companies surveyed, only 9% reported team stress, reflecting their early stages of implementation.
Despite this result, 86% of all respondents did not plan to change the size of the team. Instead, they will obtain additional external resources, make process improvements, and/or increase automation and third-party services. Most respondents (51%) outsource to manage services.
“Lease accounting is complex, and it can take a very long time to track all of the lease details and consistently get the accounting right every reporting period,” Alper said.
Return on investment
The survey highlighted that the lack of centralization, automation and system integration makes it more difficult to achieve strategic advantages and return on investment (ROI) from leasing.
Of all respondents, 70% use lease accounting software for accounting and compliance, while only 6% have an end-to-end solution for managing leases from start to end of life.
Of the SOEs surveyed, only 59% use lease accounting software.
When it comes to the return on investment for lease accounting software, 32% haven’t seen it, 20% have seen it, and 48% aren’t sure.
“In some organizations, lease accounting can be a way for accounting to begin a process of financial transformation and drive ROI from within,” Sifers said.
“We have clients who have reduced their expenses and increased their return on investment when implementing the rental system by cleaning up their lease portfolio and identifying unused leased assets,” Alper said.
“We were surprised that 40% of respondents said they paid off less than 70% of their leases on time,” Sifers said. “You don’t get the financial benefit of leasing if you don’t do what you said you were going to do with that lease.”
As companies assess lease accounting processes and resources, the report recommends the following:
- At the start of implementation, define the necessary resources and create a budget to support ongoing lease accounting compliance.
- Determine if lease accounting is critical to core operations and whether to keep knowledge of the lease process in-house or outsource it.
To optimize lease accounting and reduce challenges, companies should:
- Allow sufficient time to identify all agreements that may be “leases” and to obtain key data required from rental agreements.
- Understand accounting policy choices and rental data required.
- Identify and design overall process and internal controls, including necessary resources and skills.
“Many of the challenges for private companies today are the same as in 2017, as there is still a need to collect leases, identify key data fields, and design process flows,” Alper said. She encouraged private companies not to start from scratch in their lease implementation process and checks, but to talk to their auditors, consultants and others in their industries.