Much was happening back in 2016. Some might say it was a rough year, as the world dealt with the Zika virus; learned of the passing of iconic artist, Prince; and watched the Chicago Cubs win their first world series since 1908 (admittedly that was only rough for some of us). And then came FASB’s ASC 842: Leases — a complex regulation that would require much time, effort and resources to adopt in the not-to-distant future.
Even after a multi-year delay, the standard’s implementation date of January 1, 2022, for private companies and not-for-profit organizations has come and gone. Yet, not every organization has implemented the standard. For many it’s because they don’t have the time and resources it requires for the undertaking (as the last few years haven’t been gems either). In fact, at our recent Summer CPE Series webinar, approximately 70% of our attendees noted delaying implementation based on lack of resources and complexity of the standard.
One question clients often ask is whether purchasing lease accounting software is really worth it? Is it worth the expense and learning curve to help them come into compliance with a generally daunting accounting change?
The answer is, maybe, but there’s a good chance it could help. Take a read through some of the considerations when it comes to evaluating software for ASC 842.
Q. What Types of Companies are Best Suited for Lease Software vs. Excel?
A. While the majority of mid-market companies have under 10 leases, most lease software programs can be flexible enough to handle two leases up to thousands of leases for one organization. The question is less about the number of leases you have and more about the nature of your agreements.
Excel is a fine option if you have leases that never change, such as when a related party owns office space, or you have a 10-year lease that isn’t going to change within that time. But as soon as there are modifications, for example if your payments change, the amount of time it will take you and your CPAs to calculate the numbers using Excel will far exceed what you could have done with a specialized software program. For this and many reasons, understanding the types of leases you have is really the first critical step in the entire process for ASC 842 adoption.
Q. Where in the Compliance Process is Lease Software the Most Beneficial?
A. There are many steps a company must take to adequately prepare for the transition to ASC 842, starting with identifying the leases you have and abstracting and separating key lease information and data. However, in addition to ready-made templates and helping you understand and take advantage of key practical expedients, specialized software can help you be more efficient in two areas in particular: calculations and reporting.
New Lease and Lease Modification Calculations
Both of these calculations can be complex, and doing them manually is time consuming and can lead to costly and unnecessary errors. Sometimes, companies incorrectly or inadvertently treat lease modifications as new leases. Good lease software will provide guidance and questions to help reporting companies determine and then calculate the correct treatment. Also, software provides the necessary evidence and support of the accounting to allow for a more efficient internal or external audit of the leases.
View our full presentation on lease software from our Summer CPE Series Webinar, which includes a lease software demonstration from LeaseCrunch.
Presenting and Disclosing the Related Financial Information
The new standard has over 30 disclosure related questions and topics for companies to consider. Many of these requirements include the need to calculate and summarize current and future lease activity. Lease software can remove many of the burdens caused by trying to capture, calculate and report these items, because the tools have built-in disclosure guidance and is specifically programmed to pull and report all the necessary data. This means your financial reporting team will not have to spend hours trying to figure it all out.
Q. What Should You Look for in Terms of Security When it Comes to Lease Software?
A. From a security standpoint, look for software programs that are not locally stored either at the company level or with your CPA firm. Software in the cloud is generally the best option to protect your data. Additionally, lease software can provide integrated validation checks to improve accuracy and ensure compliance. You also can rely on the calculations and know that data is secure particularly if the software company has an Agreed-Upon Procedures report, SOC 1 Type II or SOC 2 Type II report that helps ensure data security.
Q. How Much Does a Typical Lease Software Program Cost?
A. Price can vary across the board; however, it’s fair to say that the cost of lease software generally is lower than the internal cost and time necessary to complete the accounting and reporting required with ASC 842. Of course, the solution must ultimately fit into your budget.
Q. Is Lease Software Collaborative? Can My CPA Firm Use It for the Audit Down the Road?
A. Yes. The most helpful programs are designed as a collaborative tool that works with your CPA firm. In many cases your accountant will be able to set up the account for you and invite you in, or, if independence is a concern, look for a software that allows you to disable your CPA firm’s access to your account so you can use it as a standalone program until you need to give them access during the audit period. Either way, the software you choose should give you significant control over access level, review and workflow.
If your business, like many, has leases that likely reach beyond using Excel to adopt ASC 842, do your homework. Talk with your CPA and other business owners for recommendations. Look for software solutions that are easy to use, provide information readily available within the tool to help you understand the standard, and help you efficiently and accurately adopt ASC 842. Anything less won’t be worth the price tag.
Contact Gino Scipione at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is