Council Post: Five Questions That Should Be On Every Financial Leader’s Mind

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Joe Fitzgerald is Senior Vice President of Lease Management Strategy at Visual Lease.

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The introduction of new lease accounting standards (ASC 842, IFRS 16 and GASB 87) has had a significant impact upon accounting and reporting for US publicly traded and private companies, as well as non-US companies and government entities.

Now, all of these organizations must adhere to a much more robust and complex reporting process than they had been accustomed to under the prior lease accounting standards. Despite this change, many continue to underestimate just how challenging the lease accounting process truly is.

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In July of 2021, 35% of surveyed private companies were less than halfway through or had not yet started the process of gathering the information needed for the transition to ASC 842. Furthermore, four out of 10 organizations didn’t feel confident in their ability to adopt the new lease accounting standard by the required reporting period. Failure to comply with the new lease accounting standards could result in serious consequences, including inaccurate financial reporting, increased audit fees and reputational damage.

To get ahead of these common risks, ask yourself these five questions:

1. Have we adequately alerted all responsible stakeholders that lease accounting is on the horizon?

Several different parties across the organization must participate in the lease accounting process, including individuals from accounting, real estate, legal, IT, procurement, FP&A, tax, etc.

Because there are so many different stakeholders involved—many of whom may not be accustomed to working together—it’s crucial to take time to socialize what’s ahead and to educate those responsible for managing and reporting on leases.

Including these stakeholders and their departments from the start of the lease accounting journey will allow for a more thorough understanding of all the moving parts and pieces, decreasing the chances of inaccurate or incomplete reporting, producing a better outcome.

2. What is our current lease accounting process?

Assessing your organization’s current state process will allow you to get a clearer picture of an appropriate action plan.

For example, before introducing the new lease accounting standards, lease negotiation, accounting and management were all handled separately across the organization with little to no coordination between the teams responsible for each task—and it’s not uncommon for organizations to still operate this way.

Identifying these inefficiencies and gaps throughout your current lease process will allow you to create a new template to abide by, which will help you transition to and ultimately sustain lease accounting compliance under the new standards.

3. Do we have any idea where our leases are?

Determining the completeness of your lease population and locating every lease document—particularly for large organizations with hundreds or thousands of leases in their portfolio—can be a significant undertaking. To further complicate matters, it may require collecting multiple documents for some leases where there are addendums or commencement letters, for example. Other now heightened considerations with the new lease accounting standards include the identification of embedded leases within service contracts since agreements containing certain tangible assets—ie, equipment or real estate—might now be considered a lease under the new standards.

Gathering all of this information is no easy task. In fact, the average anticipated staff hours to gather all the necessary lease information to fully adopt ASC 842 is approximately 1,300 hours (or roughly 33 weeks) for a highly skilled team of professionals.

It’s important to get ahead of this challenge and consider the time it will take to collect all of the information needed when beginning this process. And, it’s guaranteed that determining completeness will be a top priority of your auditor.

4. How will we get the relevant data?

For those organizations that have already adopted the new lease accounting standards, data is often cited as the single biggest challenge to both initial transition and sustained compliance.

Assuming you have been able to establish a complete lease population, you will then need to have the required skill set to extract the relevant lease accounting data points from those contracts.

Further, not every data element required for lease accounting will be contained within the contracts. Rather, you will need to establish a process to enrich the abstracted contract data for certain additional elements, such as a discount rate and those judgments needed to achieve day one compliance.

Going forward, you will need a process in place that maintains the accuracy of your data despite any changes that occur.

5. Have we thought about the required resources?

It’s not surprising that the complexities of these standards are driving businesses to consider investing in technology and expert third-party services to assist them.

With regard to people resources, does the organization’s current staff have the capacity and expertise for the project or will outside assistance be needed in areas such as data abstraction, accounting advisory and project management?

On the technology side, it’s important to evaluate and consider the tools that are already in place.

For example, some lease accounting software can integrate with your ERP for journal entries and payments in addition to integrating with other upstream data sources as well as existing business intelligence tools, which provide you with greater visibility into the performance of your leases. By prioritizing this sort of capability, you’ll be empowered to leverage your lease data across your business beyond accounting compliance.

By familiarizing yourself with your existing systems and capabilities, you’ll make a much more informed decision around what resources are required to elevate your lease accounting process.


Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?


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