What is lease accounting management?
Lease accounting involves recording and reporting the financial impact of leasing activities; namely, identifying, measuring, and disclosing lease transactions in financial statements.
Historically, operating leases were not included on a company’s balance sheet. However, since the introduction of ASC 842, lease accounting management now requires a far more rigorous, transparent approach.
While some organizations handle lease accounting management in-house, many will turn to their accountant or CPA to ensure compliance and accuracy.
What is ASC 842 lease accounting?
Introduced in 2016 to overhaul lease accounting practices in the US, ASC 842 was established by the Financial Accounting Standards Board (FASB) to achieve the following key objectives:
- Increase transparency of a lessee’s rights and obligations.
- Improve comparability of financial statements across organizations.
- Provide better insights into leasing activities and the associated risks.
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Why is ASC 843 so important?
The introduction of ASC 842 has certainly made waves – but what are the positive effects of this legislation?
- Enhanced financial visibility – With lease obligations now on the balance sheet, stakeholders gain a more accurate picture of a company’s financial health
- Investor confidence – Financial transparency boosts investor confidence
- Regulatory compliance – Complying with ASC 842 reduces the risk of companies falling under regulatory scrutiny.
Complying with lease management accounting standards in 7 steps
Ensuring compliance with lease management regulations like ASC 842 is essential – so it’s worth developing a strategy that works for your organization.
To get you started, here’s our 7-step framework for successful lease management.
Let’s take a look at some of the most common threats to payroll data security – including how they happen.
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Begin with a comprehensive lease audit
The first step to lease accounting compliance is to figure out what your current lease portfolio looks like.
This audit should aim to:
- identify all active leases on your portfolio
- assess each lease’s terms and conditions
- understand the financial implications of each lease under ASC 842.
This first step is vital – it’s your chance to identify potential gaps in compliance, as well as create a strong foundation for strategic planning.
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Establish a cross-functional team
Compliance is, ultimately, everyone’s responsibility and it requires a collaborative effort across multiple divisions to achieve.
If you are a business, form a dedicated lease accounting team that can all work together on maintaining compliance. You may wish to include colleagues from:
- Finance
- Legal
- IT
If you’re an accounting or CPA firm supporting clients with lease management, consider building an internal network; ideally with a similar range of talent.
This collective expertise will help you build a comprehensive and consistent approach to implementing lease accounting standards.
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Set your objectives for success
Before you begin taking action, set aside some time to define what success looks like for your organization.
Consider establishing clear objectives and control measures to track progress. Here are a few examples:
- Set key milestones to give people short-term goals to aim for and achieve (e.g. “Review existing lease portfolio by the end of August”)
- Key performance indicators (KPIs), such as measuring uptake of a new lease compliance system across the business
- Timelines to ensure you and your team have similar expectations of future action.
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Leverage technology and software solutions
While the new lease accounting standards are creating positive change across the financial landscape, it has made calculating and reporting on leases far more complex.
Thankfully, there are plenty of suitable solutions available.
By centralizing all lease-related data into a unified platform – either on in-house software or with a service provider – it’s possible to:
- Improve data management
- Reduce human error (thanks to automation)
- Gain valuable insights and analytics for more effective lease portfolio management.
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Prioritize education and train new and existing staff
There’s no point investing in new strategies and solutions if you’re not bringing everyone in on the journey.
Commit to ongoing education and training for all stakeholders involved in lease management and accounting processes. Even top-level messaging can help folks understand the importance of ASC 842 – which in turn can prompt appropriate action and up-take.
Understanding the nuances of the standard is also vital for effective communication and strategic decision-making.
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Develop and implement lease management workflows
With a solid foundation in place, it’s crucial to establish processes that support successful lease management and compliance – both now and in the future.
This includes outlining the workflows for the initiation, modification, renewal, and termination of leases. Figure out what that process looks like and lay it out in a document or shared info hub, so everyone can access and understand the workflow.
This will help you ensure all activities going forward will align with the new accounting standards.
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Establish a long-term lease management strategy
To maintain compliance in the long term, you’ll need to develop a sustainable lease management strategy.
This might include:
- Regular, ongoing audits of lease agreements and accounting management practices
- Ongoing training for staff, including refreshers for existing team members
- Fostering a culture of continuous improvement of lease accounting processes; e.g. Opening the floor to staff for ideas on how to improve processes.
Frequently Asked Questions (FAQs)
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Lease management involves overseeing and administering lease agreements for real estate, equipment, and other assets.
Lease management includes tasks like:
- Tracking lease terms
- Arranging payments
- Managing renewals
- Ensuring compliance with regulations.
Companies may choose to handle lease accounting management themselves. However, many will request their accounting or CPA partner to complete their lease accounting management obligations.
For accountants, CPAs, and financial professionals, lease accounting management involves establishing and maintaining accurate financial reporting of the lease portfolio.
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ASC 842 is a lease accounting standard set by the Financial Accounting Standards Board (FASB).
ASC 842 requires companies to include nearly all lease agreements on their balance sheets. It was brought in to overhaul the previous system and increase transparency of financial statements.
For example, a retail business must report its store leases as both assets and liabilities under ASC 842. By ensuring these leases are reported accurately, stakeholders have access to a clearer picture of the company’s financial commitments.
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Under the ASC 842 lease accounting standard, companies must disclose specific information about their lease agreements.
These disclosures include:
- Amount of time the lease has been ongoing
- The cost of the lease
- Any reasoning behind lease-related expenses.
For example, to comply with ASC 842, a manufacturing company discloses the total amount of lease payments due over the next five years. They also must explain how these leases impact their financial statements.
Proper disclosure ensures compliance with ASC 842. It also provides stakeholders with essential information about the company’s financial health.
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ASC 842 became effective for public companies for fiscal years ending after December 15, 2018.
For private companies, ASC 842 became effective for fiscal years beginning after December 15, 2021.
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IFRS 16 is an International Financial Reporting Standard issued by the International Accounting Standards Board (IASB).
Like ASC 842 in the US, IFRS 16 is a lease accounting standard that requires companies to recognize leases on their balance sheets.
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IFRS 16 and ASC 842 are both lease accounting standards and share some similar legislative demands, however, there are some key differences.
- IFRS 16 applies globally, whereas ASC 842 only applies to companies in the USA
- IFRS 16 uses a single model for lease classification, while ASC 842 differentiates between operating and finance leases
- They differ in the way they both recognize lease expenses
- There are variations in the disclosure requirements for each standard.
If a company operates both in the US and internationally, they’d need to ensure compliance with both standards.
A global accounting or CPA firm, for example, might advise clients on how to manage leases under both IFRS 16 and ASC 842, ensuring compliance with both standards.
