Article written by:
Director, Restaurant Services
With 2019 closed out, it is time to face the inevitable of Lease Accounting under ASC 842. We were given a one-year reprieve by the FASB at the end of 2019 due to the unforeseen complexities of implementing ASC 842 that many public companies experienced. Based on experience, it is complicated and tedious to implement. With that said, a proactive plan of action with established milestones can make the implementation go smoothly and cause less strain on your resources.
So let’s break the process down into what you need to be thinking about from an implementation standpoint. High level, following are the steps to consider, which we’ll be diving into over the next few months.
- Method to track your leases (Excel vs. lease software)
- Resources needed to implement and maintain
- Identifying the lease portfolio
- Evaluating the lease agreements and overall scope
- Calculating the lease obligations and right of use assets
- Financial reporting and disclosures
- Internal control processes going forward
Method to track your leases
The main question here is whether you will use an Excel spreadsheet or lease accounting software to account for your leases. What should you consider?
- Number of leases to track
- Complexity in regards to payment terms (sales-based payments, step-up rents, non-lease components, etc.)
- Frequency of changes made to the lease agreement (e.g., free rent, amendments, renewals)
- Whether you want to have a “true” lease administration system
- Automate the lease payment process
- Interfacing with a general ledger system to book journal entries
- Create lease abstracts
- Central depository for your lease agreements
- Setting up notification for critical dates to avoid missing renewals or changes in terms
- Analyzing the real estate market and related metrics
- Risk of human error – it’s likely going to happen, but will you catch it in an Excel file?
- Automated versus manual financial reporting
If you have decided to use Excel for tracking your leases, it will be important to develop an approach that treats each lease agreement consistently, to ease financial reporting requirements and journal entry making each month. It is also important to have the correct formulas in place and limited accessibility to the file so as to avoid any unexpected changes by other users.
If you have decided to utilize a lease accounting software, you will need ample time to configure the lease accounting software and be trained on how to use it. There are a lot of inputs to consider, including how it impacts the end result. It cannot be understated to give yourself ample time for proper configuration and training.
We have known this day would come for some time now, so it is time to buckle up and move forward with the implementation. A methodical approach that is well planned out will save you and your team time and frustration. Really take the time to evaluate whether Excel or a lease accounting software system is the right solution for you. Excel can be a viable solution if you have a low count and straight forward leases; however, any recurring complexities and a large volume of leases should consider the use of lease accounting software.
If you would like to talk through that decision, your GBQ team is here for you.