In January 2016, the FASB and IASB issued new lease accounting standards, respectively ASC 842 and IFRS 16. Because of these new standards, almost all lease contracts have to be included on the balance sheet by the start of January 2019. In this blog, I share three steps to take to ensure your organization will be compliant in time.
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Beginning January 1, 2019, the new Financial Accounting Standards Board (FASB) standards, ASC 842, will go into effect, bringing major changes to the way organizations’ handle their lease accounting.
Step 1: get an overview of current the situation
Even though 2019 is right around the corner, it is likely that your organization is not completely prepared yet. However, it is important to start now, as the work that has to be done is quite time consuming. First of all, you have to get a sound overview of your current lease contracts and data. How many lease contracts do you have? Where are they located? Are they correct? Does that mean that any kind of relevant changes are included? Are all financial attributes correct? Time is needed for cleaning data and validating the calculations in lease contracts. As these will have a major impact on the future balance sheet and the Profit & Loss account (P&L), it is very important to start your lease contract investigation right away.
Airlines, for example, have to include all their lease contracts of airplanes on the balance sheet. You can imagine that this will have a huge impact. They need to know what the exact impact will be so they can inform their stakeholders and investors.
This sounds quite simple, but many organizations might not even know how many lease contracts they possess. This does not only apply to relatively small organizations; even multinationals sometimes face difficulties to get an overview of all relevant contract data.
Step 2: determine which tool to use
The second step is to answer the following questions: How does your organization handle their data? And how do you get the data in your general ledger system?
It is necessary to review the system landscape to determine what can support the new requirements. If there is no suitable system already available, there needs to be a selection process established to find a suitable software solution for lease accounting in order to be compliant with the new regulations.
Step 3: adapt your processes
The third step is to make a change in processes. Due to the new standards, companies need to adapt their processes to stay compliant. It is recommended to ask assistance of a consultancy firm or an audit company to ensure the processes will be compliant and get support in the impact evaluation.
It is very important to know what impact the contracts will have on the balance sheet and the P&L. It is recommended to use software that offers reporting that can be done in two ways. One way of reporting that is compliant with the current standards during the transition period, and one way of reporting which supports reporting from 2019 and retroactively over the period 2016 - 2019. Your organization needs to know the exact differences in order to make adaptions to their lease contracts and their relevant processes.
2019 is approaching fast!
All these steps are time consuming, and organizations will want to have enough time for impact assessment and definition of new practices in portfolio planning, lease administration, and transaction management.
The devil is in the detail. What if your organization is not ready and compliant by the start of 2019? Naturally, you might be fined for it, but think bigger. In the end, you do not want your organization to be the one that is not compliant in time, do you?
Dr. David A. Martin
Former Business Development Director Planon IFRS | Lease Accounting expert
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