This article, "The clock is ticking for private cos. to tackle lease accounting," originally appeared on AccountingToday.com.
Many companies would rather just forget the past couple of years — the list of challenges they’ve faced is long, and the long-term impact of the pandemic may never be clear.
Just surviving this time has been no small accomplishment, and, to add to the stress, the ASC 842 and GASB 87 lease accounting standards’ delays are over. So, on top of everything else, U.S. privately held companies and governmental organizations are on the clock to create and execute a long-term lease accounting compliance plan. According to the new 2022 Global Lease Accounting Survey, 20% of U.S. private companies are starting implementation projects, while 32% have adopted the standard early. However, as everyone sprints headfirst into implementation, these companies are experiencing compliance challenges that others can learn from as they begin to evaluate their organization’s readiness.
Actively looking to leverage lessons learned from U.S public company implementations, private companies are not only learning key lessons but are now leading the charge in developing lease accounting efficiencies through optimization. The report indicates that 75% of U.S. private companies surveyed report using lease accounting software for accounting and compliance, a dramatic increase from last year’s 21%. Only 6% of those surveyed are using an end-to-end solution, which is to be expected as most are just getting started in automating the overall lease management process. In contrast, only 59% of U.S. public companies surveyed use lease accounting software, and only 5% use the software as an end-to-end solution that includes the competitive bidding of equipment leases all the way through to end-of-term management.
This gap in automation deployed by U.S. public companies is very real and leads to ongoing challenges. As the 2022 Global Lease Accounting Survey highlights, U.S. public companies, which are now four years into the implementation process, still face challenges, such as lack of integration, ongoing manual processes and not returning assets on time. The survey findings also showed limited lease accounting integration, governance continuing to lag other finance functions, and resource challenges for U.S. public companies stemming from lease accounting team fatigue and employee turnover. Two-fifths (41%) of respondents indicated they have a dedicated team, and of those, 35% noted they have three to five full-time equivalents, 24% of whom are fatigued.
The ongoing challenges faced by public companies are not going to be solved by manual processes and inaction. Private companies must be aware that, if not addressed from the start, process inefficiencies can lead to increased workload, errors, and audit risk.
Making the shift
Besides starting to adopt early, U.S. private companies can actively address these issues by better understanding the processes and technology needed to achieve long-term lease accounting success. For those in the early stages of their journey, they can dig a bit deeper into the key automation and integration lessons learned from U.S. public companies to help accelerate compliance.
Firms can begin by driving toward integration with business and financial systems, focusing on removing manual steps and processes to reduce cost and risk. Next, they can optimize the flow of information to make more efficient decisions throughout the lease lifecycle. And finally, by engaging the entire organization beyond accounting to optimize the leasing process from end to end, firms can fully centralize and automate lease administration and accounting processes to manage leasing complexity, improve decision-making and drive down evergreen costs.
U.S. private companies should continue to be proactive in how they start and build long-term compliance plans. However, to go beyond basic compliance and generate ROI for their lease accounting implementation project, U.S. private companies should understand the overall business requirements for the system, map out how the lease accounting system will interact with other processes and systems, and consider external financial reporting requirements. They can also begin to mitigate many of the ongoing lease accounting challenges by taking the following actions today:
- Identify all arrangements that may be or contain a lease and that require technical accounting review. This can be more time-consuming than anticipated and requires input from various stakeholders of the organization (procurement, business units, IT, finance, etc.).
- Obtain all key data fields from lease arrangements to be input into the lease accounting system. Data completeness and accuracy is central to successful adoption and is often the most time-consuming task.
- Understand and design an overall process flow for how lease accounting will support the monthly close process, making sure to include key skills and resources.
- Identify and establish key controls that will help mitigate new risks in the lease accounting process.
- Understand any downstream impacts on tax associated with the adoption of the lease accounting standard.
By determining the desired future state for the lease accounting and reporting process, each firm can choose the resource model that aligns with its strategic objectives. Taking a holistic view that includes integrations and business processes can generate long-term value.
Each firm is unique, bringing its own set of challenges and drivers for success; however, there is a real opportunity for U.S. private firms to set up a lease accounting compliance model that allows them to move beyond survival mode, shifting toward increased business value and lowered risk.