How to Gather, Track Contracts Ahead of New Lease Accounting Standard
Whether or not the Financial Accounting Standards Board (FASB) announces if it will, in fact, delay the December 15, 2019, deadline for private companies to implement the new lease accounting standard (ASU 2016-12), it’s time to begin the process if you haven’t done so already.
The first step will be to gather your contracts, which probably will be the most time-consuming step, as it most likely will involve different departments and locations. Most companies do not have one centralized leasing department that tracks all of their leases, which include those for office spaces, copiers, real estate and equipment.
When gathering leases, be wary of embedded leases, which are components within contracts that entail the use of a particular asset where the user has control over that asset. For example, in an agreement a copier lease could be present because the supplier would not swap out the copier. For real estate, there could be an agreement for a coworking space that doesn’t guarantee space (hot desking) and that agreement might not be a lease. Ask the following questions:
- Does the agreement entail the use of a specific asset?
- Does the supplier have the right to substitute the asset?
- Do you have control of the asset?
There’s no need to worry about short-term leases of 12 months or less as long as there is no option to purchase the asset that the lessee is reasonably certain to exercise. Businesses can elect to have their accounting policy to exclude these leases and treat them how they treat leases now.
The number of leases a business possesses most likely will be the biggest thing to consider when choosing how to track them, which includes using Excel and buying a new software.
There are tools that can help track large amounts of leases, but don’t underestimate the time it takes to research software and actually launch it. While businesses will need to rely on their IT department, also consider if it integrates into the general ledger software. The next consideration is are you looking for a system to track as the lessee or lessor. As many of the softwares out there originally were developed for real estate or equipment systems, there is no true system available that tracks both leases and lessors.
Here are a few points to consider while researching and previewing lease standard softwares:
- Does it provide end-to-end lease management, accounting and standardized reporting?
- Is it in compliance with ASU 2016-02 Leases?
- What happens when the discount rate changes?
- What happens if you need to change the leases useful life or payment amount?
- Ask for a roadmap for implementation?
- With this roadmap, ask for the expected timeline of each step.
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