While always impactful, new accounting standards rarely affect organizations at a scale as large as the new lease standards will. With the introduction of FASB’s ASC 842 and IASB’s IFRS 16, the two accounting standard boards are closely approaching convergence while also bringing about major changes to the accepted definition of a lease, how to manage them, and how to recognize them. Many organizations are facing significant challenges adopting and complying with either ASC 842 or IFRS 16, and most were unable to anticipate these problems before starting their journey towards compliance.
To help pave the way forward, we compiled a list of the top 10 lessons we have encountered and how they help organizations become compliant with ease.
1. The compliance process is long and requires thorough planning
With the added complexity of the new standards, many organizations are finding that their current processes and technology are simply unable to support their compliance efforts. In order to meet the requirements set by either ASC 842 or IFRS 16, companies need to have the expertise, time, and planning to pivot many of their day-to-day processes as well as their overall plans to accommodate new responsibilities.
Due to many private companies underestimating the time needed to comply with the standards, FASB delayed the effective date to December 15, 2020 – a one year deferral of the effective date. However – even with the delay – there is very little time to plan, so it’s best to start now.
2. Lease data is the first requirement. Do you know where yours is?
For most organizations, compliance will require that they modify the way their lease data is stored. It is essential that all leases are properly assessed and identified as early as possible, and for many companies, the data needed in order to do so is missing.
The first step for companies on their path towards compliance should then be ensuring that their data is properly stored and accounted for. When using siloed spreadsheets, it is challenging to have a good understanding of the relationships and changes within your lease data. However, this can be streamlined with a consolidated system for all lease information.
3. Accounting teams are not the only stakeholders. A cross-functional team goes a long way
A key requirement for a successful adoption of ASC 842 or IFRS 16 is involving anyone who impacts leases and lease contracts. A knowledgeable team can ensure that everything is set up for success and that no one person has to shoulder the entire workload.
4. This is a project and must be managed accordingly
One of the key individuals to a successful adoption of the new standards is having a competent Project Manager allows the process of shifting lease definition and communication both internally and externally to run much more smoothly. In organizations where a detailed planning and project management best practices were followed, we noticed a lower chance of error and a shorter adoption cycle. This was especially true in cases where multiple systems and teams were involved.
5. Become fluent in differentiating leases from non-leases
One of the most significant changes between the old standards and the new is the change in how leases are defined. While the new standards may seem daunting, the set of rules differentiating leases from non-leases is easy to comprehend and being sufficiently informed about it helps ensure that lease administrators and accounting teams do not have to reference a written guide for every individual lease.
6. Be prepared to overhaul your processes, and embrace automation
With many industry experts referring to ASC 842 and IFRS 16 as the most significant changes to accounting standards to date, it is no surprise that they may require some process adjustment. Both compliance standards also present an opportunity to automate lease definition processes and replacing old, error-prone operations with more streamlined ones.
7. Invest in the right tools today to save yourself the headaches of tomorrow
Having a decentralized accounting system can lead to a loss of data integrity and tedious conversion processes for matching lease information. For contracts with both lease and non-lease components, finding accurate information can mean searching through original paper documents and spreadsheets. Not only do some companies have their information in disparate systems, many suffer from data loss for smaller leases and are unable to trace back critical details about them.This is where solutions like Binary Stream’s Property Lease Management (PLM) present an unmatched value.
Property Lease Management gathers the tools needed to manage your business properties while enabling full compliance with ASC 842 / IFRS 16 and simplifying both lessor and lessee accounting processes. PLM enables multiple leases and subleases management, and streamlines complex contracts and by employing innovative lease-creation wizards to eliminate the potential for human error and repetitive tasks. Aside from the lease processing and administration, PLM also excels at building detailed vacancy and delinquency reports, rent roll reports, and lease summary reports that help companies improve their analysis and forecasting leading to better business decisions.
Want to learn more? Download our free eBook covering IFRS 16 and ASC 842.