After discussions for the better part of a decade, the new FASB lease accounting standard (ASC-842) is official. The new lease accounting standard represents one of the largest and most impactful reporting changes to accounting principles in decades, since most companies utilize off-balance sheet financing with operational leases. The standard itself is voluminous (over 400 pages) and digesting it will be a major task for companies, auditors, and accountants. Implementing practical solutions is where the rubber really meets the road.
Is your company ready to meet this challenge?
The new standard includes leases of all property, plant, and equipment and excludes (1) leases of intangible assets, (2) leases to explore for or use non-regenerative resources, (3) leases of biological assets, (4) leases of inventory, and (5) leases of assets under construction. Overall, the measurement of an operating lease is the most significant difference from previous standards; the lessee will be required to place all operating leases with a duration of 12 months or more on the balance sheet.
For several years prior, the accounting standard-setting body in the United States, the Financial Accounting Standards Board (FASB), and the international accounting standard-setting body, the International Accounting Standards Board (IASB), have been working on various convergence projects to achieve a more uniform, worldwide standard for lease accounting.
The new standard becomes effective for public business entities, certain not-for-profits, and certain employee benefit plans for annual periods (including interim periods) beginning after Dec. 15, 2018; and for all other entities, annual periods beginning after Dec. 15, 2019.
Most companies have not implemented a solution to help them become compliant with these requirements; and adding real estate and equipment leases to the balance sheet will be a sizable task.
To start down the road to compliance, businesses need to focus on several key activities:
The initial step is to understand the size and scope of the lease profile of the company. It is important to understand the classification of the lease type (building, equipment, etc.), but also understand the key characteristics that will drive the lease calculations. These characteristics can be summarized in a table to ensure you have addressed all of the functional requirements and can directly correlate an accounting procedure to meet the requirement.
While there needs to be an initial push to gather this data, most likely, you will update this information throughout the process. The key is to gather data on the most impactful set of leases as quickly as possible.
Next, your company can start the process of applying the new accounting standard to different lease profiles identified in the data assessment. The interpretation and application of the lease accounting standard will require a written auditable procedure in 2019, but during the initial assessment, establishing a framework that can be built upon over the implementation process will be sufficient. Additionally, the initial interpretation does not have to cover every existing lease, but rather just a solid assessment of the key leases will be sufficient to start the implementation of a solution. The outcome of completing the assessment process over a set of key leases will be a deeper understanding and will allow the team to identify individual scenarios that need specific consideration in the process. Overall, establishing the accounting procedures for the company’s leases will continue throughout the implementation process.
While you are completing the Data and Accounting Assessments, you will need to identify and engage with vendors on the different solutions available. Many times, high-level requirements, such as cost, functionality, or flexibility, will quickly eliminate some vendors. The key is to get to a short list of vendors that can provide you with a demonstration and proposal immediately following the assessment. Some vendors, like Akili, can support the assessment and be instrumental in defining the solution scope and change requirements. In addition to meeting the basic requirement of your company, the solution should be flexible as changes to the standard emerge over time. Furthermore, it will be important to understand and establish who will be making and implementing those changes. Is it the vendor, your IT department, or is the solution managed by the business team? All of these are key criteria in choosing a solution and implementation partner.
Lease Accounting by Akili
Akili has developed a lease accounting model based on the Anaplan Platform. Anaplan’s powerful modeling and calculation engine helps managers quickly evaluate lease accounting results. Anaplan’s platform boasts the world’s most powerful and flexible modeling and calculation engine, called Hyperblock™. This in-memory engine enables the creation of detailed models that utilize all your data, down to the transactional level, for real-time impactful business execution. Anaplan allows models to be built to any level of granularity with as many dimensions as your business requires. This allows a company to visualize the lease accounting data by legal entity, by lessor, or other management hierarchy.
Anaplan was built from day one as a cloud platform combining cutting-edge security, in-memory data management, and massive scalability. Business users can use familiar business syntax, drag-and-drop hierarchies, and built-in logic for time, versions, and scenarios. With Anaplan, there are no technical barriers between you and business insights, and requires no reliance on IT for business rules adjustments, model creation, or changes. The Anaplan platform gives you the power and flexibility to plan for any area of your business, enabling collaborative decision-making to drive improved business performance across the organization.
Akili’s Lease Accounting solution on the Anaplan platform focuses on the core requirements required to be compliant with the lease accounting standard. The requirements of the solution are detailed below:
- Consolidate lease information
- Calculate lease payment schedule
- Lease contract classification
- Lease Accounting
- Lease data management
- Calculate lease accounting entries
- Monthly lease reconciliation
- Lease Analytics & Reporting
- Business disclosure reporting
- Business management reporting
- Lease administration analytics
- Lease Planning
- Lease planning simulations
- Lease budgeting solution
- Connected planning with FP&A
Akili’s Lease Accounting cloud-based solution running on the Anaplan platform will provide a robust set of functionalities, the flexibility to update the model by business subject matter experts, and be at a reasonable cost. To learn more about Akili and the Lease Accounting Solution, please go to Akili.com or email us at email@example.com.
Robert Singer, A. P. (2017, August 23). Accounting for Leases Under the New Standard, Part 1 – The CPA Journal. Retrieved from CPA Journal: Accounting for Leases Under the New Standard, Part 1 – The CPA Journal
Stephen McKinney, T. K. (2016). An Executive Summary of the FASB’s New Lease Accounting Standard. Deloitte Development LLC.