Harnessing lease accounting centers of excellence
ASC 842, the new lease accounting standard, was adopted by most public companies at the start of 2019. Called by some experts “the biggest accounting change ever,” the new leasing standards are moving trillions of dollars of leases onto corporate balance sheets and require significant changes to accounting systems, business processes and financial controls.
The new requirements have been no small undertaking, and a deep level of technical accounting expertise is required to apply the standards, which are documented in guides numbering over 1,000 pages in length and result in over 100 billion different possible use cases.
One of the biggest post-adoption challenges for companies will be in the areas of talent, staffing and training. Companies will need to transition away from their original team used for implementation and move toward a long-term staffing strategy with in-house personnel. As a result, many companies with large, distributed leasing portfolios have centralized the staff performing record-to-report functions in a leasing center of excellence (COE). These new leasing COEs are typically being co-located with shared service centers for payables, collections, and fixed asset accounting.
The leasing center of excellence model
The specific roles and responsibilities will vary from company to company, but all lease accounting COEs own the record-to-report lifecycle performing the following key functions: Booking and classification of new leases; modifications and reassessments of existing contracts; and accounting for termination and buyouts at end of lease. The COE is a critical factor in the month-end close process. The data produced each month is then used in external disclosure and internal reports. These organizations also typically act as centralized resources for the business to answer technical accounting questions, enforce policies, liaise with local controllers and the financial reporting team, and troubleshoot systems issues.
A recent study, Lease Accounting Centers for Excellence Industry Benchmark, surveyed over 100 finance and accounting professionals from U.S.-based publicly traded companies about the staffing levels, desired benefits and the scope of responsibilities of leasing centers. The following key findings and infographic aim to help public companies benchmark their investments and compare staffing approaches to their peer group.
Adoption: Leasing centers of excellence are the preferred operational model for public companies. More than half (55 percent) of all public companies surveyed have built a center of excellence. Another 14 percent have plans to build one, leading to a projected 70 percent adoption rate by the end of 2020.
Benefits: Unlike with shared service centers for accounts payable and collections, the primary benefits sought by public companies are not cost savings. Instead, the COE team has gained a deeper expertise in the complexities of the standard (75 percent) and stronger controls (65 percent).
Staffing: Companies are not outsourcing lease accounting to third parties yet. Eighty percent of respondents report that leasing centers are staffed with only employees. Most teams are small, with two-thirds of centers staffed with just one to five employees.
Activities: Staff are heavily involved with month-end close performing activities such as posting journal entries to the general ledger (70 percent) and account maintenance (67 percent). More complex tasks such as embedded leases and reassessments are escalated to headquarters staff.
Challenges: The most challenging tasks are tracking changes to the lease portfolio such as new leases (50 percent), contract changes (65 percent) and end of lease buyouts, returns and terminations (37 percent).
ASC 842 has been a massive project at most companies, with thousands of hours invested to collect leases and abstract data, deploy systems, and design processes and controls. Companies still have a large undertaking ahead and must work diligently on their transition to longer-term, sustainable strategies for success.
Moving forward, controllerships face the challenging task of transferring the day-to-day responsibility for lease accounting to newly formed teams in a center of excellence. However, the ability to enable, train and optimize these centers is a make-or-break factor in the ability to provide complete and accurate reporting while minimizing the human capital involved in the process. To achieve long-term success, firms must continue to move past the workarounds and consultants in order to start developing proper controls and processes.