Meeting the Updated Lease Accounting Standards

Man with computer and many papers in front of him

The Financial Accounting Standards Board’s updated lease accounting standards represent a major revision that affects multiple aspects of lease accounting. The changes, first announced in February of 2016, include:

  • Additional disclosures
  • More rigorous lease administration
  • Alterations to balance sheet treatment
  • Modified cost factor capitalization
  • New reporting on lease extensions and indexations

While business leaders immediately recognized that the updated standards create a significant impact on their lease accounting responsibilities, the full realization of what these changes mean for record-keeping has come more slowly. Complying with the revised standards requires a comprehensive review of a company’s lease accounting procedure and, in many cases, a revamped approach to record-keeping around the entire lease process. Most importantly, the changes call for a solid plan to help your company manage any necessary changes surrounding lease data, lease accounting resources and understanding the revised law.

Data

Many of the challenges in meeting the new standards revolve around lease-related data; gathering, tracking, monitoring and storing key information lie at the core of compliance. It’s important to establish a workable process to manage this data from the outset, and to ensure that any lease accounting protocol maintains all relevant data in a centralized database that is both complete and accessible. Multiple offices and accounting systems add to the challenge here, as does the fact that leases often cover a period beyond a single year.

An effective data management system for lease accounting should keep all lease-related information – including procurement, administration and accounting – in a single repository that remains accessible for several years after the lease is concluded. Your lease accounting plan should contain regularly scheduled review points to ensure that lease documentation is complete, so that there are no surprises when it is needed later.

Resources

The additional lease reporting and tracking requirements in the updated standards come with added costs in terms of human and financial resources. Plan to have extra personnel devoted to these tasks as well as creating and implementing new systems and processes, learning and operating any new accounting software and managing the staff who perform the added work.

Be prepared for the financial impacts too; software needs and additional staff hours come at a cost that previous budgets didn’t need to accommodate. Until the new protocols become routine, it’s best to budget generously for additional staffing costs and technology expenses – particularly in the initial year or two.

Knowledge

Learning what to expect and how to most effectively manage the lease accounting process will inevitably take time, but don’t delay. Adopt a proactive stance to understanding the law’s changes and what they mean in practice. How will your processes need to change? Do you need specialized software to track and manage lease accounting data, and, if so, what kind? Does your current data retention policy allow for keeping all relevant lease data accessible for an appropriate time period?

Getting a handle on the law and its ramifications is no easy task, given that many accounting professionals are still unclear to some degree regarding the updated standards and how to implement them correctly. Nevertheless, investing the time and effort now to fully assess the revisions and their impacts will pay off in greater compliance and an easier adjustment period. It is imperative that internal and external accounting personnel obtain a clear understanding of the latest lease accounting standards in order to design and implement an effective compliance process.

The Takeaway

To minimize the difficulty of meeting the new lease accounting standards, businesses should be aware of potential roadblocks to compliance as they implement necessary changes. A formal plan for dealing with these changes and a disciplined approach to record-keeping are critical, along with a clear understanding of all that compliance with the updated rules requires. For insight and advice to help your company make a smooth transition to the revised lease accounting standards and other changes that are sure to come, trust the accounting professionals at Halt, Buzas & Powell.