Key Steps to the Lease Accounting Close

Gordon B. Johnson

To comply with the new lease accounting standards, companies have had to put into practice new business enterprise procedures, new organizational constructions, and new information techniques. Most companies have muscled by means of the initially year of adoption applying a mix of brute pressure and large-priced consultants. On the other […]

To comply with the new lease accounting standards, companies have had to put into practice new business enterprise procedures, new organizational constructions, and new information techniques. Most companies have muscled by means of the initially year of adoption applying a mix of brute pressure and large-priced consultants. On the other hand, these methods will not scale in excess of the lengthy phrase.

The complex accounting variations promulgated under the new standards are just a single element. Accountants will have to make major judgments to conform with the new lease accounting policies. Those judgments must be frequently re-evaluated and current as facts and circumstances develop into regarded, and contingencies fixed. 

Reassessments and remeasurements of recorded lease property and liabilities are now a commonplace party, normally taking place every thirty day period. As opposed with the historic near method utilized under the legacy leasing standards, ASC 840 and IAS 17, various procedures have been added to the document-to-report procedures. There are new quantitative and qualitative disclosers, new standard ledger accounts, and new controls expected. On the other hand, the most cumbersome new procedures drop on the teams exterior accounting. A lot of may perhaps be new to accounting and the new standards.

Some large companies have hired new team to near the expertise gap lesser companies are relying on standard accounting team to cope with leasing. In both of those cases, numerous accounting teams are nonetheless applying unreliable spreadsheet products, program hacks, and guide reconciliation procedures to get there at the entire set of month-to-month journal entries necessary for the near. 

Ultimately, achievement with lease accounting will call for companies to changeover to a remarkably automatic document-to-report method. That method need to involve a consistent, repeatable near that fits into the over-all corporate reporting timeline, as the new standards call for lease accounting at the asset level. 

8 Actions

With these troubles in brain, we have outlined the eight critical techniques that companies will will need to focus on.

  1. Master info updates — The lease accounting program will will need to be current frequently with new master info. Examples involve variations to standard ledger codes, expense facilities, tax rates, depreciation techniques, financial lives, overseas trade rates, incremental borrowing rates, credit rating rankings, and financial debt weights. Other updates might involve the addition of new physical destinations, new asset kinds, and new lessor relationships.
  2. Account maintenance — The standard ledger accounts, business gain facilities, or expense-centre splits related with various property might adjust through any supplied accounting time period. As a consequence, the gain centre related with the asset will will need to be current. For most companies, the more major challenge will not be producing the updates to the program, but relatively identifying that a adjust needs to arise. 
  3. Celebration procedures — On regular, fifty% of a common lease portfolio variations through any supplied year. The business indications new leases, payments adjust, the lease phrase extends or is terminated early, and property are added or eliminated to or from a lease. Contracts are modified, some others expire, renew, or terminate. Guaranteeing the completeness and precision of the lease portfolio will call for sturdy party procedures at thirty day period-conclude near to accomplish commencement, termination, and modification accounting.
  4. Command procedures — All through the near method, a series of management procedures need to be executed to verify the precision and completeness of the accounting. The types of controls will range, but most will style and design procedures to tackle the regions of highest inherent possibility and these that possibly breach materiality thresholds. Typical regions of focus involve IT standard controls, confirming the precision of inputs to and outputs from techniques validating judgments, estimates, and assumptions utilized and reconciliations among the standard ledger and the sub-ledger.
  5. Publishing of entries and reconciliation — At the time the detective management procedures are completed and the lease portfolio deemed to be entire and exact, the closing journal entries need to be geared up for add to the standard ledger. Organizations will will need to weigh the expenditures and positive aspects of various methods ranging from absolutely-automatic program-to-program integration to a guide file extract and add by means of the person interface. Firms with numerous ERP platforms may perhaps will need to use various various methods to be certain the journal entries are posted effectively to the GL.

At the time the entries are posted to the ERP, the reconciliation of the balances of all lease accounting standard ledger accounts in the ERP must be done to the lease accounting sub-ledger. The ideal follow is to reconcile in transaction currency, useful currency, and reporting currency.

  1. Disclosures — The new lease accounting standards call for major and significant new quantitative and qualitative disclosures not found under the outdated standards. Some companies will have more complicated disclosure specifications that call for modeling and reporting in a spreadsheet for example, segment or business enterprise unit reporting. Others that have statutory reporting that does not align with their fiscal calendar may perhaps call for custom made reporting strategies to comply. A lot of qualitative disclosures, this sort of as assumptions, judgments, coverage elections, simple expedients, and standard descriptions of the lease populace, are unlikely to adjust usually. On the other hand, companies will will need to be certain that new contracts and modifications identified through the party procedures (e.g., sale/leasebacks) are incorporated as ideal.
  2. Shut — At the time all accounting and disclosure reporting is completed and the reconciliation with the standard ledger is entire, the sub-ledger can be shut. Some companies may perhaps accomplish a tender near just before completing actions this sort of as management screening or disclosure era.
  3. Put up-near adjustments — Pursuing the near, teams need to revisit party procedures to establish any variations to the lease portfolio that not captured in the prior period’s accounting. Organizations with a extended length among the time of sub-ledger cutoff and the over-all near will probably have more new leases, contract variations, and terminations to consider.

The new leasing standards, which took ten many years to be issued by the respective boards, are a single of the most major accounting variations in history, impacting almost every business subject to an exterior audit. Even though some companies have transitioned efficiently to these standards, some others are nonetheless having difficulties to make the required business enterprise method and management variations. A lot of are re-analyzing their techniques technique to make greater use of technologies to regulate the leasing lifecycle and automate fiscal reporting. People who have found early achievement, and will go on to do so, have adopted answers that provide an automatic document-to-report method that consists of a consistent, repeatable near method. It also guarantees that business policies and procedures are used on a consistent basis in excess of the overall lease portfolio.

Len Neuhaus,CPA, is the vice president of lease accounting for LeaseAccelerator. Prior to becoming a member of LeaseAccelerator, he led the project administration office for the implementation of ASC 842, Leases, and ASC 606, Earnings from Contracts with Buyers, at Intercontinental Flavors & Fragrances.

ASC 842, contributor, lease accounting

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