Overcoming largest setbacks & challenges, related to ASC842 lease accounting
Pretty much everyone has labelled the ASC842 as an accounting standard that’s difficult to grasp and get on terms with. All organizations face or have faced their fair share of challenges. To be frank, it’s not the easiest set of rules to get your head around, and once you and your staff do, it’s the work you need to complete that’s really challenging. But in this article, we’ll focus on the largest challenges that could provide setbacks, related to ASC842 accounting for leases management and, of course, highlight how to overcome them!
When it comes to accounting and the area of finances, reports are a must-have source of information. For higher management and the board, they’re the most clear-cut indication of how the company is doing financially and whether the business is on the right track. Reports must be easy to generate in order to achieve the highest possible accuracy and to process the most data (e.g. crunch numbers).
And that’s a big challenge, because most companies are stuck generating reports manually or using legacy software to do that. Some say that companies with around 50 lease accounts should consider switching to dedicated ASC842 lease accounting software but we advise doing that with only 20-30 leases on hand. Previously, you may’ve been able to get away with simple Excel-based calculators but with the new requirements on lease population and other value inputs, it’s kind of crucial to have software which is able to do things automatically for you. In terms of making your reports more accurate and relevant, your business should
- Define the needs of higher-ups and/or stakeholders
- Eliminate the need for manual labor, wherever possible
- Keep data organized and accessible cross-platform
- Continuously review the results
This could be your first step towards generating reports for ASC842 leases with much greater ease.
Calculating various rates, related to ASC842-only
If you’re using a calculator, as opposed to dedicated software, you’re likely struggling with calculation of certain figures and rates. The first thing that comes to mind in this category is, of course, discount rates. It’s one of the more challenging areas to cover, especially with the new regulations in place.
Incremental borrowing rate is always a reference point to keep on-hand. Your software will always have such data, in case you have to do an unexpected re-calculation after a certain period has elapsed (described in the lease agreement, etc.) or in any other circumstance.
Sometimes calculating certain rates is near-impossible without the involvement of other departments, because certain figures and details are only known by account managers or legal teams, or financial departments (most of the time). Even though this part for requesting additional info will consume more time, it is going to ensure the correct result in the end.
Sounds complicated and very abstract, right? Well, that’s because every single company has a different policy and different rates, related to this. You can’t look for external sources for guidance and refer to previous work experiences. This is only something that you can find within your organization and, once again, dedicated lease accounting software will help simplify it because you have all of the necessary data close by.
Lease identification and categorization
Yes, one of the main issues and pain points of carrying out ASC842 finance lease management is related to identifying the leases themselves. With the regulation change, the barrier between what used to be considered a lease and now can be categorized as one, has been blurred. Regardless of that, this issue is the most important one to take care of, if you wish to further succeed in managing these objectives. Take an TBA or TBD timetable and go through this day-by-day until everything is in order. Don’t leave a single point behind and allocate sufficient human and other resources to handle lease identification. This will help ease the difficulties which might lie along the way.
The largest issue is the so-called implanted or embedded leases which are a part of contracts for services. This means that you should have a well-balanced approach to document and account revision, in order to quickly recognize such leases within service contracts to locate which leases are sort of hidden away and which ones are more easily recognizable.
How to identify an embedded lease? That’s quite simple, although might sound tricky at first. They key word here is limit. How much use are you limited to? Most lease experts say if you’re limited to using the asset and can’t switch it or trade it for benefits, it’s considered a lease. But, let’s say if you’re using a forklift in your warehouse and you can determine the amount of how its use daily and periods of time when it isn’t use, then that’s an operating lease. It all traces back to lease identification as with earlier accounting standards, you weren’t obliged to categorize and analyze your leases that much.
Handling lease identification
Staying in theme of lease identification, US GAAP identification can cause a lot of issues for a business trying to identify what’s what. We recommend involving as much personnel in this, as you can, to understand every contract that’s currently active. Have a complete list for things like subscriptions your company uses, rents, lease agreements, service contracts, etc.
The second area to look at is seeking out repeating invoices (e.g. recurring) to ensure that service contracts get checked out smoothly and without too much delay.