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Lease Accounting Transition Advice from the Experts

Accountants

Lease Accounting Transition Advice from the Experts

The new lease accounting standard, ASC 842 is coming. Are you prepared enough?

Private companies are either implementing ASC 842, or they are preparing for it. With the new standard comes a lot of questions. We gathered three LeaseQuery accountants— who have already completed their transitions to ASC842—to weigh in on the process and offer you their best tips to remember as your organization moves forward.

For those who haven’t yet implemented ASC 842, you can look to early adopters to determine the best process for your organization. Meet our panel, Rachel Reed, Accounting Manager, Emily Fish, Product Accounting Specialist, and Sarah O’Sullivan, Director of Product, who discuss the biggest challenges they faced when adopting the new standard.

While this blog will cover the basics, we encourage you to watch the on-demand webinar for a thorough deep-dive. Additionally, our ASC 842 Adoption Survival Kit has everything you need for effective adoption strategies.

Determining and evaluating lease accounting solutions

One of the biggest pieces of advice is to use specialized software with templates and auto-populated drop-downs to help organize your leases. We found it much more efficient than Excel for lease accounting and manual data entry. Using your own spreadsheets leaves you vulnerable to more errors and a larger risk of misstatements.

The biggest transition challenges

Transitioning to ASC 842 is certainly difficult work, but it can run smoothly if you prepare yourself for the challenges ahead. Below, our webinar panelists revealed their biggest lease accounting challenges so you can see what you may need to flag to [AS1] your organization.

Looking past adoption day

When choosing an accounting solution, you must look beyond adoption day. Many accountants are so focused on the transition, they fail to recognize they will have to follow ASC 842 into the future.

Prepare for your effective date and set yourself up for future adoption too. A lease accounting tool can help you with reports and other documentation which will save your organization time and resources down the line.

Use an effective lease accounting solution

When seeking a tool for lease accounting, consider using reliable and specifically designed software, rather than Excel. Although many accountants have experience using Excel, manually entering data into a spreadsheet leaves more room for human error that could impact your organization[AS2] .

 Auditors play a key role in the adoption process.  It’s better to use lease accounting software now to avoid auditors catching errors down the line through their transition process. Audit procedures are drastically changing under the new standard, and you could face the dangers of audit risks and potential failures if you don’t plan ahead.

Expect the unexpected

When adopting ASC 842, look for opportunities being created outside of your original expectations, especially when using a lease accounting solution. However, unexpected challenges may occur as well.

The transition impacts everything

The new standard can impact everything, as experienced by our experts. All of the processes they previously followed changed drastically once they implemented ASC 842, so after implementation, we recommend the following:

  • Create new accounts
  • Add new balance-sheet reconciliations
  •  Generate new month-end close tasks.

Centralized data encourages better communication surrounding lease arrangements. Don’t underestimate the impact of ASC 842.

Post transition, leverage the updated lease information to make more informed business-decisions. Processes will improve and the organization will become more efficient.

Better budgeting and forecasting

Many companies have seen an improvement in budgeting and forecasting since implementing the new standard. Finance teams can build accurate lease budgets for future periods and quickly make forecast predictions because of the data available and the ease with which it can be updated.

Determining and applying borrowing rates

According to ASC 842, the incremental borrowing rate (IBR) is “the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment.”

Even with a solid corporate treasury department to help determine the rate, it can be heavily scrutinized by the audit team, as one of our experts discovered. Another panelist didn’t have treasury to help calculate their IBR, so they consulted with a “Big Four” accounting firm to help determine their borrowing rates.

Both methods were applied by public companies. If you are a private organization, you also have the option to choose a risk-free rate instead of an IBR. While a risk-free rate may be an easier process, you will still have to talk with the same departments, document your decisions, and obtain auditor buy-in as you would with an IBR.

Tips for implementation

Because so many public companies have already adopted the new standard, advice is readily available for private companies currently going through the same process.

 Save time on implementation with these tips from our panelists:

1. Start now rather than later

Start now. The process is going to take longer than you anticipated. If you put it off until the last minute, you won’t have time to properly prepare for any complications you may have.

2. Use a reliable software solution

Remove manual errors. Use a tested, reliable accounting software solution, like LeaseQuery, to implement ASC 842. The software will provide your organization with benefits beyond compliance, like improved budgeting and forecasting, and will help you make better financial decisions.

3. Research companies who have already implemented ASC 842

Do research early. Because public companies have already completed the adoption process, there are plenty of useful implementation examples from them. Several resources exist to offer you the best tips and tricks for a smooth and successful adoption. Thorough research will give you the best chance of following the process correctly.

Summary

Time is of the essence so start by seeking out public companies who previously completed the transition to learn from their experience, and bolster your own. Use a comprehensive, proven software solution like LeaseQuery to ensure the implementation process runs smoothly and give your organization plenty of time to adopt ASC 842.

 Ensure your transition is successful from start to finish with our ASC 842 Survival Kit which includes an abundance of resources and tools to ensure your transition is successful from start to finish.

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