The new leasing regulations are just around the corner, and preparations for implementation should have already have begun in your business. Cameron Nokes, Senior Product Marketing Manager at Accruent here tells Lawyer Monthly all about it and gives expert tips on how you can get ready for the shift.
It’s official. New established guidelines for both FASB (ASC 842) and IASB (IFRS 15, 16 and 9) are approaching quickly and it’s essential that finance and facilities management teams start preparing now. But according to Deloitte, over 55% of professionals surveyed are not prepared for these upcoming changes. Not only will the FASB accounting standard see a name change from FAS-13 to Topic-842, but operating leases will be included on the balance sheet, and as a result, some companies will have to change the way that they manage their leases.
Each new standard represents its own challenge for finance departments, real estate and facilities management teams. Public enterprise companies with large operating lease obligations will be most affected by the new standards and face the highest risk of failing audits.
So, what do organizations need to know before Topic-842 goes into full effect?
Know the facts
The Financial Accounting Standards Board was established in 1973 to “establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports.”
Nongovernmental companies and organizations must comply with these established standards. The most recent of these standards is Topic-842, which was introduced in February 2016, and requires that organizations include lease obligations on their balance sheet.
The standard goes into full effect for public companies in the 2019 fiscal year. Private companies must bring all operating expenses onto the balance sheet by fiscal year 2020. For most organizations, the changes will create a greater compliance burden and have a material change on corporate financial statements. In order to meet these standards, it’s important to invest in a lease administration solution that can simplify the process of adhering to key requirements set forth by FASB.
Do your homework
Right now, there’s an initial adoption surge as organizations are looking to make their buying decision in the next 6 to 9 months. While the new standard doesn’t go into effect until 2019, some organizations want to use 2018 as a reporting and parallel year to ensure they are ready once the standards are officially implemented. These organizations see 2018 as a pre-test - a year of transition without the concern of a failing grade.
Prior to adopting the new standards, businesses should compare old numbers to new numbers in order to gauge the overall impact on the business. Businesses should also educate themselves on the types of leases they are managing by creating a classification test to determine if a lease is a finance or operating lease. In the past operating leases were not included on the balance sheet and therefore reduced administrative efforts. With Topic-842 bringing operating leases onto the balance sheet it’s important that these leases are properly categorized so the reporting will be compliant.
It's a Group Project
With key stakeholders - lease administrators, IT, legal and finance - all trying to solve different problems, communication within the organization is integral to adopting these new standards seamlessly. The lease administrators are charged with managing existing leases, IT is responsible for the technology system and the legal side is ensuring that the business is compliant with the new standards. But it’s the finance team and the CFO who make the final decisions since they are the ones controlling the money spent on the adoption process and ultimately responsible for disclosing and demonstrating financial compliance.
Businesses should see this FASB change as an opportunity to strengthen process automation so the business can operate better as a whole. Part of this process is getting rid of things like spreadsheets which make it harder to improve controls and find errors. Since implementing a technology system does come with a cost, it’s also important that the organization is aligned internally and selects partners or vendors who can grasp the details without disrupting business practices. All departments must work with accountants and auditors in order to streamline business controls and communicate any changes in processes. This communication will help ensure that the accounting is done right within the system. If teams work together to purchase a technology system and establish a process Topic-842 should not change how the business is running.
Ready or not, the new FASB leasing standards are coming. These changes don’t have to be an arduous process though. Preparing early, knowing what needs to be done and investing in a lease administration solution can simplify the process of adhering to key requirements set forth by FASB, so organizations can resume business as usual.
