In 2016, the Financial Accounting Standards Board and International Accounting Standards Board issued new accounting standards, ASC 842 and IFRS 16, which change how organizations are required to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements.
With the new standards scheduled to take effect in January 2019, organizations are making plans to ensure they are in compliance. In the process, they will navigate challenges such as assessing their company-wide leasing arrangements, determining a go-forward leasing strategy, establishing program leadership, extracting lease contract metadata, implementing new business processes, and determining the role of new lease accounting technology platforms.
As organizations evaluate their leasing activities, many are realizing that most leasing activities are decentralized, with various groups managing the lifecycle of leasing in silos. This is causing leaders to think about Day 2 of the new leasing standard – i.e., maintaining compliance for the long term, not just for Day 1. Centralization across asset classes, business units and geographies can provide a foundation to control processes, cut waste, reduce costs and provide greater visibility to make more informed decisions.
Choosing to centralize will likely broaden the scope and charter of a company’s lease accounting compliance initiative. As it reframes the initiative from a pure compliance effort to a strategic business initiative, it may affect which functions own and take part in the effort. Leaders might not want to broaden their program scope right now; however, it will benefit them to direct their teams to start thinking through Day 2 and planning for the future.
For example, they should consider establishing a leasing center of excellence as a fractional or virtual responsibility for some of their critical team members. When selecting a software vendor, they should be sure to assess whether one of the lease accounting software companies can provide the cross-functional glue that connects their future leasing activities. A review of the existing lease accounting software providers revealed several robust solutions with proven track records of going beyond compliance to centralize information, manage workflow and deliver cost savings. In other words, they do much more than just simplifying the accounting work required for compliance.
Organizations pursuing a lease accounting program should consider the following steps to aid in that process:
1. Establish a cross-functional steering committee. Their accounting and SEC reporting leaders will need executive support in multiple functions and business units. They should structure the effort not as a project siloed in accounting, but as a strategic program that will define their organization's go-forward leasing strategy. Positioning it as a strategic program acknowledges the many functions needed to make the initiative a success, and commands the central management to provide executive support and oversight. They should consider elevating its status to one of their key corporate initiatives for the year to increase awareness of the magnitude of change and what it means to people across the organization. Viewing a program through this strategic lens can help right-size change management and communications from the start.
2. Choose a cross-disciplinary program leader. A dedicated leader is essential to success. They shouldn’t expect a critical member of their accounting or SEC reporting team to have the bandwidth for this role alongside the quarterly cadence. Instead, they should choose someone who can give 100 percent to moving the organization beyond simply complying with the new standard. This leader must be able to clearly define the program, its scope and key working groups, with the know-how to drive decisions and select the steering committee. They should look for the ability to think strategically and deliver outcomes across a complex landscape of functions and business units. They’ll want demonstrated experience in finance/accounting, software implementations, change management, operations and process improvement and strategic execution.
3. Establish work streams; engage the auditor. The strategic program will need work streams that cover:
- Program leadership and governance;
- Contract scoping and readiness;
- Business process design;
- Software selection and implementation;
- Contract data extraction and loading;
- Accounting data, reports and validation;
- Accounting policies and controls; and,
- Change management.
They should ask their auditor for guidance regarding their future lease accounting audit plan, as they’ll want to be sure that their approach to process, controls and data will pass an audit test. Many audit teams focused much of 2017 on the new revenue recognition standard, so they may need to direct their auditor on what they need and when.
4. Implement an interim process for 2018. The full lease accounting solution will likely require a project plan that spans several months or quarters. If the company decides to implement software, they’ll need to factor in design, build and implementation time. They’ll also need an interim, parallel process that folds their current leasing activities into the final leasing business processes when the full solution goes live. This is a good opportunity to pilot and refine their approach to centralized leasing.
The new lease accounting standard is a significant change that touches the entire organization, not just the accounting and SEC reporting teams. If companies take this opportunity to centralize their leasing activities, they can transform the upcoming compliance requirement into a strategic business win.