In 2016, the FASB and IFRS issued new accounting standards, ASC 842 & 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. Now, with the new standards scheduled to take effect January 2019, organizations are planning how to meet this new compliance reality. In the process, they will navigate an array of challenges such as assessing their company wide leasing arrangements, determining a go-forward leasing strategy, establishing program leadership, extracting contract metadata, implementing new business processes, and determining the role of new lease accounting technology platforms.
For mid-sized and large organizations, this new standard has implications for change far beyond the confines of accounting compliance and SEC reporting. It's an opportunity to reduce annual costs and get more strategic with the significant spend on real estate and equipment leases.
Point B's Perspective
If leasing plays a sizable role in your business, we recommend using your move to the new accounting standard as an opportunity to go beyond compliance and achieve better control of leasing activities, capture greater value, and reduce spend.
Most leasing activities are decentralized, with various groups managing the lifecycle of leasing in silos. 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 about leasing activities.
Choosing to centralize will likely broaden the scope and charter of your lease accounting compliance initiative. As it reframes your initiative from a pure compliance effort to a strategic business initiative, it may affect which functions own and take part in the effort.
As you consider centralizing your leasing activities, you will want to select the best approach for your organization. You will want to consider establishing a leasing center of excellence and whether one of the lease accounting software companies can provide the cross-functional glue that connects your future leasing activities. Our review of the existing lease accounting software providers revealed a number of robust solutions with proven track records of going beyond compliance to centralize information and deliver cost savings. Of course, they also greatly simplify the accounting work required for compliance.
We have observed organizations that decide to pursue a more centralized approach once they get a few months into their lease accounting effort and recognize the need to implement a sustainable solution. It's our perspective that teams need to do the following things in order to get off to the right start:
Establish a cross-functional steering committee.
In order to centralize leasing, your accounting and SEC reporting leaders will need executive support in each function and business unit affected by your decision. We recommend structuring the effort not as a project siloed in accounting, but as a strategic program that will define your 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. Consider elevating its status to one of your key corporate initiatives for the year. Higher status can increase awareness of the magnitude of change and what it means to people across the organization. Seeing your program through this strategic lens can help right-size change management and communications from the start.
Choose a cross-disciplinary program leader.
A dedicated leader is essential to success. Don't expect a critical member of your accounting or SEC reporting team to have the bandwidth for this role alongside the quarterly cadence. Instead, 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. Look for the ability to think strategically and deliver outcomes across a complex landscape of functions and business units. You'll want demonstrated experience in finance/accounting, software implementations, change management, operations and process improvement, and strategic execution.
Establish work streams; engage your auditor.
Your strategic program will need work streams that cover the following areas:
- 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
- Change management
Insist that your auditor provide guidance regarding your future lease accounting audit plan. You want to be sure that your 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 you may need to direct your auditor on what you need, and when.
Implement an interim process for 2018.
Your full lease accounting solution will likely require a project plan that spans several months or quarters. If you decide to implement software then you need to schedule time to design, build and implement it. Meanwhile, your leasing activities go on. You will need an interim, parallel process to account for them —and this interim process needs to fold into the final leasing business processes when the full solution goes live. This is a good opportunity to pilot and refine your approach to centralized leasing.
The Bottom Line
The new lease accounting standard is a significant change that touches entire organizations, not just the accounting and SEC reporting teams. If you take this opportunity to centralize your leasing activities, you can transform the upcoming compliance requirement into a strategic business win.