Regulatory Changes for Lease Accounting (IFRS 16 / ASC 842)
Asset leasing has been a burgeoning requirement for the accounting industry. As more and more companies take advantage of the financial flexibility that leasing offers, more attention needs to be paid to the regulatory changes for leased assets. For over 40 years, the long held requirement that only capital leases had to be accounted for on the balance sheet has finally changed. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) jointly worked on an update to the existing Accounting Standards Codification (ASC) 840 concerning leases due to disclosure reasons and issues with analyzing corporate financial data.
Impact of the New Standards
Expansion of the Balance Sheet
With the change in the accounting treatment for operating leases, a vast amount of leases have to be accounted for directly on the balance sheet. IFRS estimates that over $3 Trillion will be added as right-of-use assets with a corresponding lease liability. This will expand the balance sheet for those who make extensive use of leasing operations.
Timeline of Regulatory Changes for Lease Accounting
Prior to the change, companies were allowed to only disclose basic information about their leasing activity in their financial notes. In January 2016, the IASB finalized their new lease accounting standard; IFRS 16. FASB followed up shortly thereafter in February 2016 with the release of ASC 842 concerning the same topic.
The goal was to improve transparency when making comparisons between companies. This is a significant benefit to shareholders and investors but represents a significant undertaking for customers to organize and accurately report on their leased assets.
Compliance & Challenges
Are you fully compliant with ASC 842? Have you:
- Gathered and cataloged all active leases?
- Assigned ownership for lease management?
- Reviewed and optimized business processes concerning how leases are signed, valued, and monitored?
- Reviewed ASC 842 regulatory reporting requirements?
- Coordinated with internal/external audit and SOX regarding leases and the controls for managing them?
The next major concern is regarding software selection. Does your IT staff have the functional expertise for this change in accounting regulation? Which technology platform / vendor are you going to work with? Does it integrate with your existing fixed asset, real estate, procurement, accounts payable, and general ledger systems?
Accounting for leases has several difficulties including:
- Initial setup and capture of lease agreements
- Proper valuation and capitalization of the leased asset
- Depreciation requirements
- Tax requirements, impacts, and reporting
- Leased asset and real estate reporting
- Accounting for unique transactions that are subsequent to the initial setup. Adjustments to leased assets can be difficult especially if not recognized in the correct period.
- Most importantly, does the lease software integrate with your existing financial system? If it’s cloud based, what tools and APIs are available to get that data on your network?
Ensuring Your Success
The best way to ensure your success with lease accounting is to hire the trained professionals at Serio Consulting.
Benefits of using Serio Consulting:
- Professional consultants, not contractors
- Average of 20+ years of SAP experience
- Domain expertise in the capital and leasing areas
- Trained and certified on SAP solutions
- Implementation approach and methodology unique to your company
- Post go-live support
If you’re looking for the most optimal solution with the lowest amount of risk, Serio Consulting is the only choice.