It has now been two years since the Financial Accounting Standards Board (FASB) issued its final standard (Topic 842), which delineates the changes that will be made to lease accounting. The changes were debated for a number of years and, due to the significance of the changes, the FASB applied a rather long adoption period:
- Effective date of January 1, 2019 for calendar fiscal year public business entities;
- Effective date of January 1, 2020 for other entities with calendar fiscal years.
Under the new standard, lease accounting will become more complicated, especially as it applies to lessees. Therefore, lessees and the recordkeeping challenges posed by the new standard will be the focus of this article.
Accounting Implications of FASB’s Redefinition of Leases
Leases, currently classified as operating leases, allow the lessee to avoid recognizing the lease obligation as a liability on its financial statement. The conclusion reached by the FASB would require that all leases, except certain narrowly defined short-term leases, be recognized on lessee balance sheets as a Lease Liability with an offsetting Right to Use asset. The definition of a lease becomes more complicated and many provisions in the lease have to be identified and evaluated to determine whether there are accounting implications that must be addressed.
With respect to expense recognition, the FASB classifies leases into two types — operating and financing — with many equipment leases falling into the financing type and most real estate leases falling into the operating type. For financing type leases, expense recognition would be accelerated while for operating type leases, expense would be recognized basically on a straight-line basis — as it is now under current generally accepted accounting principles (GAAP).
The accounting change will make lease management and accounting more complex. The new accounting model will require more sophisticated financial calculations and will mandate more monitoring and tracking of lease details.
Continued Use of Spreadsheets Will Make FASB Compliance Harder
A recent survey found that more than one-half of the lessee organizations surveyed use spreadsheets to maintain lease information. There are inherent limitations in spreadsheets, which will make it much more challenging to continue to use this type of technology for lease management and accounting.
Here are a number of reasons why using spreadsheets may not be feasible going forward and why a more sophisticated lease management solution may be beneficial to all but those that have a small number of leases.
Spreadsheets can be challenging to incorporate into the internal controls of the organization; therefore, there is greater risk of carelessness and unintentional error on the part of employees. It is extremely difficult to identify those employees who might access and make changes to these spreadsheets.
It is simply not easy to validate the details and formulas embedded in spreadsheets, particularly when it comes to complicated rent calculations. In the current environment, where audit and review (especially in public business entities) are so important, this is a major drawback that cannot be overlooked.
Information sharing is a critical element to an effective business environment. The ability to provide employees with easy access to information that will make them more productive is a key element to successful operation. Spreadsheets do not lend themselves to collaboration, particularly within organizations that have widespread operations. One byproduct of implementing the new lease standard is to do it in such a way as to improve the overall efficiency of the leasing process.
More and more businesses operate from remote locations or have employees who work at home or spend much of their time “on the road.” Maintaining critical information on spreadsheets that this type of employee cannot access simply does not work anymore.
As a business grows and the business information that must be tracked grows more voluminous, maintaining such information on spreadsheets becomes much more cumbersome. For example, spreadsheets do not lend themselves to portfolio level aggregation and dissemination of information by location. Complex spreadsheets, loaded with details, are sure to result in a less efficient operation.
State of the Art Technology Solution
Last, but perhaps most importantly, spreadsheets are not the most current solution for information gathering and analysis that is available today. Spreadsheets were introduced at a time when there were limited technology solutions available. We now have more sophisticated technology applications that are easy to use, intuitive, and cost effective. Why wouldn’t a business take advantage of the latest technology?
A lease management and accounting technology solution can contain much more robust features as compared to the capabilities of spreadsheets. Some of these technology solutions are cloud-based applications, meaning that they are easier to implement (requiring only an internet connection) and highly cost effective. It is time to investigate fully all the alternatives that are in the marketplace to make your organization more nimble and effective.