Industry experts from leading accounting and consulting firms estimate the failure rate among new lease accounting compliance projects to be as high as an astonishing 25%, based on feedback from companies working on new standard adoption by the end of 2018.
That means numerous organizations must now absorb the sunk costs and time investments of troubled adoptions plans in order to pivot and move forward with an improved ASC 842 and IFRS 16 transition approach. Meanwhile some late-reporting public companies and numerous private companies are just beginning their adoption adventure.
Whether still assessing the impact of lease accounting changes or reworking a failed implementation, organizations can take a more strategic approach to lease accounting compliance with the best practices and lessons learned from companies that successfully completed the transition journey.
Immediately following the revenue recognition standard, many organizations underestimated the effort and time needed to meet the new lease accounting changes. Right out of the gate, lease data collection is a challenging obstacle for most enterprises. The volume of leases across numerous departments and operating units – including embedded leases in service contracts – has stunned many project leaders. Providing executive sponsorship of project management and influencing cooperation of stakeholders to obtain leasing information really is mission critical.
Other project miscalculations include underestimating the impact and added demand on staff for compliance, as well as the training needed to implement new accounting policies, processes and management software. Failing to allocate ample budget and time for these considerations caused a spike in demand for resources at the end of 2018, along with additional costs.
Recording virtually every lease on the balance sheet is a complex task, and everyone involved should possess a deep knowledge of both new standard requirements and of company-specific lease data. Accounting policy details proven to be problematic include the nuances of transition accounting, the complexity of ongoing compliance and the impact of foreign currency.
A thoughtful approach to accounting policy changes, reviewed by financial leadership and auditors, is the key to success in this area. The value of go-forward accounting efficiency will quickly outweigh any hasty decisions to meet a one-time compliance event, especially when re-measurements and “true-ups” become necessary.
Software Product Essentials
However, lease accounting calculations are more complex and nuanced under the new standards. That fact, combined with the certainty of auditor scrutiny in this area, motivated many companies to buy a software product from a flurry of new options on the market.
Unfortunately for some, a thorough review of software requirements was not conducted prior to purchase. Upstart vendors sold solutions that weren’t fully developed and lacked the functionality to handle all the lease accounting complexities. As a result, many new systems caused projects to fail, either because they were not built to support common leasing scenarios or simply could not produce accurate calculations, necessary reports, or reliable accounting controls.
But now, accounting firms that helped clients cross the compliance finish line know which software solutions are battle-tested and can be quickly and reliably deployed. Ideal vendors can also load a company’s own sample lease data and demonstrate capabilities in real time, or provide a sandbox environment for stakeholders to review.
Other essential product characteristics include a strong track record of managing both real estate and equipment leases under the previous ASC 840 standard, audit trails for all user activities, SSAE SOC audits and platform security, as well as seamless integrations with major ERP and IWMS systems.
Leading companies that wisely invested in true enterprise-class lease management and accounting solutions are now equipped to effectively handle the high volume of data requirements associated with lease accounting compliance and the push to shorten month end close. They also can effectively move toward a system of “continuous accounting,” in which data flows seamlessly from one process to another.
The complexity of lease accounting compliance efforts are substantial. Financial leaders who have met compliance agree that starting sooner and getting more people involved earlier would have made things go much better. To learn more about how to successfully meet the requirements of ASC 842 and IFRS 16, download a free copy of CoStar’s newest whitepaper – Enterprise Lease Accounting Lessons Learned – and visit www.costarmanager.com for helpful articles and more information.
This article was written by Matt Waters, CPA and Director of Lease Accounting with CoStar.