Lease Accounting Guidance: Testing With Hypothetical Calculations

As you prepare to implement the new lease accounting standards, you’re going to have questions and you’re going to need lease accounting guidance. Certainly you’ll turn to your accounting advisory partners for answers. However, there’s another source of lease accounting guidance you might not consider: your lease accounting software.

Let’s be clear: lease accounting software can’t recommend which decisions you should make. But it can provide the tools to help you test different scenarios without affecting your live data. Doing that shows you exactly how your choices will impact your balance sheet and financial reports. That’s powerful intelligence that can help you avoid mistakes and make better decisions.

5 ways to get lease accounting guidance with testing tools

If you’re still deciding about lease accounting software, look for these helpful testing features that prepare you for the new lease accounting under GAAP and IFRS.

These features give you the ability to “test drive” your data and your calculations. That’s important now as you develop new lease accounting practices. Also, you’ll find it helpful after you implement the new standards, since you can test a change without affecting your live data.

1. Get a preview of your new financial reporting.

This is probably the most important lease accounting guidance you need right now. Chances are, your financial leaders are anxious to see what your reporting is going to look like under the new standards. You want to understand the impact of the changes so you can take action as needed (such as preparing stockholders and lenders for what to expect).

You can get that information well before you’re ready to go live using the hypothetical testing features in Visual Lease. You can generate a preview even if you haven’t imported all your data yet. Just do a bulk upload of test data. Then you can generate a hypothetical disclosure analysis to see what your numbers will look like. You can even see side-by-side comparisons of reporting under the current standards (FASB ASC 840 and IAS 17) and the new standards (FASB ASC 842 and IFRS 16).

2. Set up pending calculations for peer review.

As you prepare to implement lease accounting changes, you’re likely planning a peer review process and verification of your calculations before you go live. Whether it’s to have a more experienced person check someone’s work, or just to put a second set of eyes on your journal entries, it’s a smart strategy.

Visual Lease’s pending calculations feature makes it simple to streamline that process. Simply set up new lease records and calculations as “pending.” Once they have been reviewed and validated, all it takes is the click of a button to activate them.

Related article: Lease Data Validation Steps for FASB/IFRS Accounting & Reporting

3. Test different interest rates.

Financial leaders also want the ability to test different scenarios that may occur to see how they affect the balance sheet. Here’s a great example: interest rates. While a small change in your borrowing rate may not affect smaller leases, an interest rate change may have a huge impact on a high value industrial lease.

Visual Lease’s hypothetical calculations feature, you can try out different values (without impacting your active data) and see the resulting change in the lease accounting calculations, such as the right-of-use asset and liability amounts.

4. Test different standards and classification options.

When things are changing in your business, you need to plan ahead for those changes. The lease accounting guidance you get with Visual Lease’s testing features can help you prepare for what’s coming.

Here’s just one example. Let’s say your company reports under US GAAP now, but plans to open a new facility outside the US next year and begin doing business in new regions. You’re going to want to see what your lease accounting looks like under the international lease accounting standards (IAS 17 is the current international standard, and the new IFRS 16 standard takes effect at the same time as the new FASB ASC 842).

Also, your lease classifications will change when you report under IFRS 16, so you’ll want to see how that changes your balance sheet.

You can also use this feature to help you make decisions when negotiating lease terms.

Here’s some more lease accounting guidance for you: read this article to learn more about the differences between FASB ASC 842 and IFRS 16.

5. Plan for exercising lease options.

Speaking of lease decisions, whether or not you decide to exercise lease options can have a big impact on your lease accounting. That’s especially true for long-term real estate leases. The information you get from testing your options can be a big help with planning and budgeting.

For example, should you exercise an option to extend a lease for an additional 3, 5, or 10 years? For high value leases, understanding how that would affect your lease accounting obligations could impact your decisions about options.

And don’t forget, when you classify your leases, you need to specify whether or not you are “reasonably certain” to exercise options. If you’re unsure about making that call, being able to easily test different scenarios can provide helpful lease accounting guidance.

Testing helps you plan ahead and prevent mistakes

The bottom line is, nobody likes surprises when it comes to lease accounting. Being able to easily test different scenarios without impacting your live system is the best kind of lease accounting guidance.

Want to see what that looks like? Schedule a live demo of Visual Lease.