For private companies faced with adopting ASC 842 and/ or IFRS 16 this year, there are many complex lease accounting decisions to make. These decisions impact not only your compliance project, but ultimately your balance sheet, financial reporting, and ability to pass audits.
How will you make those decisions, especially if you’re not an expert on the new standards?
Many companies will benefit from advisory expertise to guide them. Here’s why.
Private Companies Are Underestimating the Complexity of Lease Accounting
For private companies who do not have massive global lease portfolios, adopting the new lease accounting standard (FASB ASC 842) might appear to be a simple exercise. We are seeing many who assume they can purchase software, load in some data, click a button, and achieve compliance.
The reality is, even with a smaller lease portfolio, adopting the new standard is complicated. Simply adopting software and putting data into it does not make you compliant.
For one thing, software can only perform calculations and create journal entries from the data you put in. If you’re missing data, or your payment entries are not properly broken out, what you get out of the system will be incomplete and inaccurate.
Getting compliant with the new standard requires making accounting decisions that have big implications for your financial reporting. Those decisions impact what data you will put into your lease accounting system, and in what format. We’re talking about decisions about practical expedients, discount rates, and other factors that impact your calculations and reporting.
If you’re not an expert on the new standard, it may be tempting to rely on advice from your software vendor to help you make those decisions. Keep reading to learn why that’s a mistake.
Why Trust Accounting Advisers for Advice About Accounting Decisions?
When it comes to adopting the new lease standards, there are gray areas that may force you to make decisions about how you want to handle your lease accounting. When it’s time for an audit, you’ll need to justify your decisions. That’s why you need to carefully consider who you rely on to help you make them.
Here’s an example. We worked with a large public energy firm that has many thousands of leased port-a-johns in its portfolio. According to ASC 842, any lease longer than 12 months needs to be included on the balance sheet, and therefore in lease accounting calculations. Even though these leases were longer than 12 months, they comprised less than 1% of the firm’s total lease disclosure dollar amount.
The head of financial reporting decided that these leases were not significant enough to include in lease accounting calculations. He felt that making the effort to collect all the data and perform complex calculations didn’t make sense, given that the result would make little impact on the financial statements.
When this company faces an audit, they will need to defend that position to an auditor. If you’re in that position, how will you do it? Here’s what won’t fly: telling an auditor your lease accounting vendor said it was okay. It’s very likely the auditor will be concerned about a conflict of interest with advice from a software vendor, even if they are experts.
If you have carefully studied the standards, you may be comfortable relying on your own expertise. Otherwise, citing advice from recognized experts from major accounting firms is the safest way to make sure your decisions are sound (and justifiable to an auditor).
7 More Reasons to Get an Accounting Advisory
If you’re on the fence about whether it’s worth getting help from an accounting advisory partner, consider that they can help you with much more than decisions about what to include in your calculations. Here are just a few areas where an advisory partner can ease the burden of getting ready to adopt the new lease accounting standard.
Technical accounting. Advisory partners can steer you through the process of making the important up-front accounting decisions about practical expedients, discount rates, and other gray areas.
Tax implications. Your lease accounting decisions can have significant tax implications. Advisers can help you work through that and be prepared.
Centralizing lease data. An adviser can help with the complex and time consuming process of gathering distributed data into a central location for importing into your lease accounting system.
Data validation & analysis. You’ll need to understand exactly what data points to collect for each lease, and validate the completeness and accuracy of your data. An advisor can expedite your data collection efforts and help you avoid mistakes.
Vendor selection. An adviser can help you define software requirements based on your specific needs and priorities, and recommend appropriate tools.
Policies and process control. Getting compliant is only the beginning of adopting the lease accounting standards! Going forward, you’ll need new policies and procedures for approving lease financials and getting the data into your accounting systems. Advisers can help you design new controls.
Change management. Once everything is ready, companies will need to manage the change process with communication and training. Advisors can help put that into place.
We Are Committed to Your Success
Like many lease accounting software providers, Visual Lease has technical accountants and CPAs on staff. However, we’ve made it a policy not to make accounting decisions for our customers. Not because we can’t give good advice, but because advice from a software vendor will not satisfy an auditor. It’s just too risky for our customers.
We want you to be successful in adopting the new lease standard, with complete and accurate reports that don’t draw flags from an auditor. That’s why we highly recommend doing your due diligence and getting credible and reliable advice from advisory experts.
Learn more from these related articles:
FASB Lease Accounting Changes: How to Assemble Your Readiness Team
Lease Accounting Implementation for Private Companies: 5 Pitfalls to Avoid