4 Strategies for Lease Accounting Transition

New rules more than a decade in the making will “bring leases to the balance sheet,” marking a major change in how companies have historically accounted for leases.

While leases have remained off-balance sheet in the footnotes of financial statements, the new rules will require companies to recognize and report almost all leases – with the exception of low-value asset leases and short-term leases lasting less than 12 months – as right-of-use assets and lease liabilities before IFRS 16 and ASC 842 come into force in January 2019.

With less than three months to comply for a calendar year company, most accounting teams are far from the finish line. According to Deloitte, 79% of U.S. companies “do not feel very prepared” to achieve full compliance, leaving an overwhelming majority of organizations currently at risk of facing heavy fines when the new standards take effect next year.

Organizations lagging in their lease accounting transition should consider these strategies to expedite the transition as the deadline looms:

1. Don’t spend time answering the wrong questions

Whether accounting is at the start or in the midst of transition, it will pay to critically evaluate the compliance process. Asking the following questions will help to ensure that processes are streamlined and efficient:

Will the system shorten timelines? Effective leasing administration systems should speed up, rather than slow down the compliance process due to complex implementation or integration processes.

Does the system reduce risk? Consolidating extensive leasing data and identifying embedded leases is a complicated undertaking with lots of room for error. Lease accounting systems should reduce the chance for error—not add to it.

Does the system eliminate dependencies? Integration with ERP and other systems take time and effort, and customized systems can create unnecessary complexity. Effective lease accounting solutions should provide the options for quick, standalone deployment and the flexibility to have the solution integrated with other modules once the compliance has been achieved.

Will the system achieve compliance with minimal effort? Effective lease management systems should allow accounting teams to comply with the new standards, while limiting the amount of manpower and resources needed.

2. Keep data collection and abstraction lean

Data collection, the important step in achieving compliance, can be the most burdensome. To comply, accounting will require tools that are able to identify, gather, and organize leasing data. This does not necessarily need to happen from scratch.

One method is a data dictionary that lists all data elements required for compliance and identify required stakeholder information. In most cases, this can be provided by or created with a lease accounting solution vendor. Another method is creating upload templates to collect information from contractors and upload leases en masse. Once data elements and stakeholder information are centralized, tagging tools and elastic search capabilities enable the indexing and searching of data, allowing organizations to track, manage, and organize an expanding leasing database.

3. Know the transition methods and practical expedients that apply to new law

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