Ever since the Financial Accounting Standards Board (FASB) announced new lease accounting standards in 2016, businesses have worked to understand their responsibilities under the revised rules. The new rules apply to all companies. Nonpublic companies must comply starting with financial reports issued on or after December 15, 2021. While this deadline might feel like it’s far in the future, it’s important to get started on an implementation plan now. The new standard requires substantial changes in balance sheet treatment of leases, as well as additional disclosures and a more stringent lease administration process.
With such big revisions, it’s no surprise that many businesses are struggling to fully comply with the new standards. But when it comes to Generally Accepted Accounting Principles, compliance is the only option. For better success with your lease accounting plan, take care to avoid these six common mistakes:
- Decentralized information. Establishing a clear process and maintaining good organization around lease procurement, lease administration, and lease accounting is crucial to accurate reporting. When this information is scattered between multiple systems and offices, it’s harder to track all the elements. Keep clear records of all lease-related activity together, so you can access this documentation easily when you need it.
- Incomplete or inaccessible data. Be sure to review lease-related records and verify that lease information on file is complete at each stage of the compliance process. And leases commonly extend over multiple years, so it’s also important that the company’s retention policy maintains key information in a format that is both available and accessible. Be alert for potential problems with accessing the data. For example, with some forms of digital or tape long-term storage, data cannot easily be viewed or extracted.
- Insufficient human resources. Tracking and managing lease information under the new standard requires more time and attention than it once did. Businesses should plan for additional time and personnel to adequately implement new processes and procedures, gather and review data, create and monitor systems, and manage the individuals responsible for all these tasks.
- Unexpected cost overruns. If meeting the revised standards requires more time and people, then financial costs rise as well. Budget for these expenditures ahead of time to avoid last-minute cash flow problems with wider ramifications for the business. Added costs may drop as teams get familiar with the new protocol, but the initial experience can give valuable insight about the true costs of compliance for budgeting in subsequent years.
- Inadequate understanding. Although the regulations have been published for two years now, many professionals don’t fully understand the new lease accounting standards or know how to implement them properly. To maintain compliance, it is critical that internal and third-party accounting professionals gain full knowledge of the updated rules (check out the FASB’s educational resources) along with the systems and processes the company establishes to meet them.
- Having no plan. Lease accounting is complex under the best of circumstances, so businesses should approach the changes with an organized plan that includes checkpoints along the way. Businesses with a significant number of leases might want to invest in specialized software to help with lease accounting, which will take time to select and implement. But every business needs a clear plan.
Just like when Sarbanes-Oxley first became law, the new lease accounting standards represent more challenges to implement and manage. While no business welcomes accounting changes that are costly and complicated, the goal of compliance makes the effort worthwhile.
By avoiding these common mistakes, you can create a smooth accounting and reporting process that becomes routine and keeps your company on the right side of compliance with the standards. It’s not an easy goal, but CRI’s experienced professionals are here to help you meet your responsibilities under the latest accounting standards.