Blog December 18, 2019

New lease accounting standards: Driving compliance through collaboration

By Tony Famularo, CPA & Larry Lazerwitz, CPA

Takeaways:

  • Private companies and non-profits shouldn’t procrastinate, even with the deadline extension to 2021.
  • Collaboration across reporting lines within an organization can make the transition to compliance with the new lease accounting standards easier.
  • Lease accounting and administration software can support collaboration, updated business processes and operational controls.
  • Corporate occupiers with large portfolios can leverage software to gain strategic insight.

The new lease accounting standards (FASB ASC 842 and IFRS) have already become a reality for all public business entities that follow ASC 842 and all businesses that follow IFRS 16. Now it’s time for private companies to join the compliance soiree.

Even though the deadline for FASB private companies and most non-profits to bring leases onto the balance sheet is now for fiscal years beginning after December 15, 2020, it’s not an excuse to procrastinate. FASB extended the deadline an extra year for good reason, and it would be a huge mistake to think, “I have another year before I need to start worrying about this”. Please keep in mind, companies still have the option to adopt the standard early, prior to the new extended date.

Contrary to popular belief, the new lease accounting standards are not a black-and-white rule book with step-by-step instructions on how to achieve compliance for your organization. There’s a lot of gray area, and many items are subject to interpretation. That’s why accounting departments need to focus on more than just which numbers to include in the financial statements. It’s time to also think about collaboration, business processes, and operations to ensure a smooth transition to the new standards.

Driving collaboration through technology

Before the new standards came into being, real estate leases were often managed by a dedicated department within the organization, with finance having little responsibility for them. As a result, many real estate management teams today don’t have enough accounting expertise to correctly adapt to the new compliance rules by themselves. And even if they do, finance will need to consider the effects of lease accounting in the context of the business’ balance sheet.

The same holds true for equipment leases, which are also affected by the new standards, and will likewise require people who haven’t traditionally interacted much to collaborate with each other moving forward. Equipment leases may present an even greater compliance challenge, since in most cases they drastically outnumber real estate leases, making them more difficult to wrangle even though they represent a smaller value.

Compliance with the new lease accounting standards requires collaboration among many different functions within an organization, including: real estate, accounting, finance, operations, information systems, procurement, etc. For both equipment and real estate leases, software systems designed to enable compliance with the new lease accounting requirements can reinforce updated business processes and create easier routes for staff to get the necessary figures. Putting operational controls in place can reduce the risk of error and make it easier to manage processes and requirements across different lease types.

Comprehensive lease accounting software can provide a best-of-both-world solution – staff can enter the data one time to fulfil both the lease administration and lease accounting requirements from within the same system. Reporting functionality allows users to slice and dice the data from multiple perspectives, providing more insight into the operational performance of the portfolio. Lessees can more easily identify opportunities for cost savings, leverage better terms for landlords, and aggregate the data for a more holistic view.

Strategic benefits of lease accounting software

The impact of leases extends beyond the physical property that it covers. For corporate occupiers with a sizeable or high-value real estate portfolio, the way real estate and leases are managed can have a significant effect on business strategy.

As the landlord/tenant relationship evolves into a vendor/customer relationship, metrics regarding tenant satisfaction, appreciation, and turnover will be more important than ever. While the rules have not changed much for commercial landlords, they still need to understand the influence that the new regulations will have on their tenants and how it could affect deal structures and negotiations in the future.

For corporate occupiers, the FASB deadline extension is not a reason to wait. It’s a chance to take advantage of extra time and avoid potential headaches. By leveraging lease accounting technology, you can encourage collaboration across departments and strategically set your organization up for future success.

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