Adapting to New Lease Accounting Standards: Challenges and Opportunities

The new lease accounting standards are developed by the Financial Accounting Standards Board or FASB, the Governmental Accounting Standards Board or GASB, and the International Accounting Standards Board or IASB. While the FASB collaborated with the IASB initially to create the new standards, the GASB worked on the development of its new standards independently. There are some noteworthy differences among these new standards. 

The new standards impact every company that engages in leasing assets. Specific considerations exist within every standard to eliminate certain kinds of transactions from short-term leases or capitalization. That said, any company having the right to utilize a minimum of 1 in-scope asset that qualifies as a lease must implement the new standards. 

The main alteration to lease accounting per new standards is that companies now need to recognize lease liabilities and lease assets on their balance sheet for the majority of the lease arrangements. Lessees must compute the future lease payments’ future value to set up a lease liability along with the related right-of-use or ROU asset. Note that the lessor accounting will differ on the basis of the standard. In the case of GASB only, lessors will have to replicate the accounting on the side of the lessee, recognizing deferred resources inflow and a lease receivable. 

Some other changes that companies must adapt to are as follows: 

• Lease definition
• The treatment of non-lease and lease components 
• More vast disclosure requirements 
• Lease definition 
• The definition of initial direct costs or IDC

Adapting to the above changes efficiently can help organizations improve their lease portfolio management.

Let us explore the reasons why the introduction of each of the new lease standards took place.

• ASC 842

The aim of ASC 842 is to address a significant loophole that concerns ASC 840. Its objective is to provide an organization’s financial statement users with increased visibility into the leasing obligations. To ensure ASC 842 compliance, companies must disclose their leased assets, categorize the lease as operating or finance, and report the monetary values.  

• IFRS 16 

Its objective is to make companies report details that denote lease transactions faithfully and give financial statement users a basis for evaluating the timing, amount, and uncertainty concerning cash flows resulting from leases. To fulfill the objective, lessees need to recognize liabilities and assets resulting from a lease. 

There are two IFRS 16 transition approaches that companies can choose from when applying this standard. One is the full retrospective, while the other one is the modified retrospective. Organize can weigh their pros and cons and decide which one to utilize. 

• GASB 87 

The objective of GASB 87 is to improve the usefulness of the financial statements belonging to the government. It does so by imposing the requirement of reporting specific lease liabilities. Per GASB 87, the reporting of every lease must take place as a financial lease or a capital lease. 

• GASB 96 

GASB 96 provides guidance as well as addresses how government organizations will account for investments and costs concerning information technology arrangements based on subscription. Moreover, it provides guidance as to how such organizations will disclose these investments and costs. 

Overall, the main objective of these new standards is to simplify lease portfolio management and help organizations give a clear picture concerning their financial standing.

Some of the key lease accounting challenges associated with the new standards are as follows:  

• Embedded Losses: Considering that an agreement can fulfill the lease definition, every lease will not be apparent. The leases could get buried with non-lease transactions, for example, service and product arrangements involving the utilization of plant, equipment, or property. Therefore, identifying the leases could become more challenging. Some examples of contracts that may have embedded leases include data storage contracts, warehousing contracts, transportation contracts, and security contracts. 
• Project Team: Shifting to new lease accounting standards will require a lot of effort by the accounting team. Moreover, the new standard’s effects may extend beyond accounting departments and end up impacting treasury, tax, and possibly operations. 
• Maintaining the Leases: Many companies with global or decentralized operations are concerned about their capacity to spot and monitor all the leases. The new standards’ potential magnitude will make it necessary for organizations to carry out a controlled process for lease data management, lease accounting, and administration. Moreover, this process must be integrated into a company’s internal control structure and financial reporting challenges. 

Other lease accounting challenges include —

• Securities and Exchange Commission (SEC) scrutiny 
• Loss of available funding 
• Increased audit costs 
• Stakeholder 

To overcome different challenges associated with the adoption of these standards, companies can utilize software for the new lease accounting standards. Such tools can help in lease portfolio management, automating journal entries, and consolidating data from different sources. Moreover, lease accounting software can ensure lease accounting optimization and help fulfill compliance demands.

Chief financial officers or CFOs, accountants, and lease administrators can follow these steps to ensure compliance: 

1. Business owners need to first evaluate the Impact of the new lease accounting standards on their organization 
2. Next, the organization must review the existing leases that might be necessary to adhere to the new standards.
3. They need to update the accounting systems so that their financial statements accurately reflect the new standards. 
4. Organizations must educate their staff and provide them with the necessary training to help them understand the changes. 
5. Lastly, business owners need to ensure that the organization remains up to date with the changes to adhere to the rules and regulations. 

Note that businesses can also leverage lease accounting software to simplify financial reporting compliance. Such software streamlines lease accounting, provides insights via data analytics, and ensures compliance and efficiency.

The new standards have opened the door for cost savings and optimized lease portfolio management. Through the reevaluation of lease agreements and the leased assets’ utilization, organizations can potentially minimize the lease-related costs and discover efficiencies. As a result, applying these standards will align with compliance goals while sparking operational improvement and strategic decisions. 

The new lease standards can minimize the requirement for stakeholders to provide compensation in case a lack of financial visibility arises. Moreover, it can help provide a more detailed insight into the obligations of a lessee and lead to fewer opportunities for businesses to manipulate any lease transaction.

According to experts, the new standards may have a significant impact on companies operating in the following industries: 

• Wholesale and distribution
• Hospitality
• Consumer Products 
• Automotive 
• Retail 
• Professional services 
• Airlines 
• Healthcare  
• Textile/Apparel

The future of lease accounting will involve leveraging various technological advancements to enhance lease portfolio management. Let us look at some of these technologies that will play a key role in lease accounting: 

• Artificial Intelligence and Machine Learning: AI can help in automating tedious tasks, for example, contract analysis, via the extraction of relevant details from documents. Moreover, systems powered by AI can also help in spotting errors or missing data in lease portfolios. Furthermore, machine learning can improve lease projections and financial forecasting over time. 
• Blockchain: Blockchain technology can prove to be a game-changer for lease accounting as it can give a transparent, immutable ledger comprising all transactions. This transparency can help significantly enhance the auditing process as every lease transaction would get recorded and become accessible in real-time. As a result, there will be little room for manipulation or discrepancy. 
• Real-Time Reporting and Increased Automation: With the introduction of more advanced automation tools, organizations will be able to streamline complicated processes, for example, financial reports’ generation and the reconciliation of compliance checks and lease payments.
• Cloud-Based Solution: The popularity of cloud-based lease accounting software will increase in the future as more and more companies adopt it to get access to all-lease-related data from a location of their choice. This will be vital, especially for organizations having remote workforces and geographically dispersed locations.

With the introduction of the new lease accounting standards, companies may have to overcome various challenges. However, the opportunities that these standards present can be extremely beneficial for companies to enhance their lease data management and lease portfolio management processes. Moreover, with technological advancements on the horizon, the future looks bright for lease accounting companies.