Readying Your Organization for New Lease Accounting Standards

Once again proving that change is the only constant, corporate accounting teams are readying themselves for new lease accounting rules that could have a huge impact on their companies’ financial statements. Because of the meaningful accounting changes involved, it’s important they begin preparing now.

The International Accounting Standards Board (IASB) issued IFRS 16 in January 2016, and the Financial Accounting Standards Board (FASB) issued ASC 842 in February 2016. The intention of the new lease standards is to improve financial reporting about leasing transactions by requiring those who lease things such as facilities and equipment from others (lessees) to recognize assets and liabilities for all leases, with certain exceptions, on their balance sheets. Current leasing standards require this type of recognition only for capital leases, but now lessees must recognize operating lease assets and liabilities on the balance sheet as well.

Under US GAAP, the changes are scheduled to take effect for public companies after December 15, 2018, and private companies after December 15, 2019. Under IFRS, the changes are scheduled to take effect starting January 1, 2019 for all companies. Companies should be aware that there are significant differences between guidance applicable under US GAAP and IFRS.

Corporate accounting teams need to begin working to understand the details of the new standards and take steps to prepare, including the following:

• Identify all leases: Prepare an inventory of all lease contracts and examine the agreements to see if they fall under the guidance.
• Evaluate impact: Begin examining how the new standards will impact financial statements, as well as the potential regulatory and tax implications of the changes. It’s also important to evaluate the impact to business processes and internal controls.
• Assess preparedness for transition: Explore whether current systems can easily support this change or if there is a need to evaluate and deploy a new solution.

As with any regulatory changes, a key consideration—one that is often overlooked—is whether you have the right systems in place to support ongoing change. Similar to the new revenue recognition standard, finance systems are especially critical in helping organizations prepare for and adopt the new lease accounting rules. Here are some questions to consider when assessing if your finance system can support these changes:

• Will your system easily enable you to generate the appropriate accounting entries for the initial recognition of lease assets and lease liabilities on the balance sheet and support expense recognition, lease asset amortization, and lease liability amortization?
• Can your system support both full and modified retrospective approaches for adopting the new standards?
• Can your system easily enable the required changes to business processes and ensure the right controls are in place?
• Does your system support the new standards without the cost and effort of a software upgrade or need for a bolt-on application?
• Does your system document and support the auditability that is so critical when going through a transition that could impact financial statements?

Under the new guidance, companies may have to make big changes to processes and the segregation of duties, and will need stronger internal controls to monitor lease activity through the life of leases. Workday Financial Management customers are already covered, because Workday’s Business Process Framework—where all business activity is modeled and governed, is built into the foundation of the application. This will make it easy for companies to create and modify processes and routing to job roles as they make the transition.

Many companies today are managing lease amortization schedules in spreadsheets, increasing the risk for errors and making it difficult to establish effective controls. Workday Financial Management will support the full lease accounting process in one system, including the initial recognition of lease assets and lease liabilities, automatic generation of supplier invoices for lease payments, expense recognition, lease asset amortization, and lease liability amortization. Finance teams can reconcile amortization schedules back to balance sheet entries in the same system, making it much easier to comply with the new lease accounting standards.

As with the new revenue recognition standard, it’s important that companies begin preparing now. Keep a look out for more from us on the new leasing accounting standards in the months ahead.