The boards announce IFRS 16 / ASC 842
In the first quarter of 2016, after nearly a decade of deliberation, FASB & IASB released a new accounting standard which significantly affects the way companies account for operating leases. Under the new standard (IFRS 16 /ASC 842) a lessee is now required to recognize operating leases on its balance sheet as a lease liability with a corresponding right-of-use asset.
This requires generating the accounting over the entire life of the lease. This is a significant change from today’s accounting requirements which allow the lessee to exclude operating leases and will bring trillions of dollars in leasing agreements onto the balance sheets of organizations.
For lessors, the standard does not substantially change current accounting but does require organizations to classify leases into two types: Sales-type capital leases and operating leases which determines how and when a lessor recognizes lease revenue and what assets a lessor records.
Importantly, any leasing solution must also interface with IFRS 15/ASC 606 Accounting Systems in order to correctly classify and account for a Lease arrangement. Aptitude Software is a market leader in IFRS 15/ASC 606 compliance with 3 of the top 4 North American Telcos using the Aptitude Revenue Recognition Engine.
Common challenges to standard adoption
For many organizations, the new standard will move hundreds or thousands of lease contracts onto the books and require a level of data collection, storage and lease accounting scenarios that were not previously required. For lessee accounting, challenges will include:
- Data challenges: Many data items may not be captured in current lease management systems and will need to be enriched in order to drive the required accounting.
- Multi-GAAP accounting for leases: Multi-national companies will have to go from no accounting for leases to maintaining two separate sets of books to address the different standards. For example, a US company with a subsidiary in Germany will need to report under FASB which requires a classification test for leases and a specific form of accounting. For IFRS the accounting for finance leases slightly differs. You will need to track the two stand-alone sets of amounts.
- Accounting for various types of leases: Different types of lease arrangements such as sub leases and sale leasebacks require unique and complicated accounting.
For lessor accounting, challenges will include:
- Accounting for new business models: Many industries, like telecommunications, have never had to act as a lessor so they don’t have systems to address the accounting requirements. This will be unfamiliar territory.
- Integration with Revenue Recognition Systems: Any solution will need to tightly integrate with IFRS 15/ASC 606 systems to provide a common audit trail and facilitate explanations of calculations and calculation logic.
- High contract volumes & complex calculations: Contract volumes are high since they typically are made up of consumer items like handsets and thousands of calculations will need to be completed to determine the Expected Minimum lease payments, the lease IRR, present values, net investment of the lease and the monthly capital lease interest schedule.
The Aptitude Lease Accounting Engine (ALAE) for lessees & lessors
Aptitude Software is working with our clients and top advisory firms to deliver the Aptitude Lease Accounting Engine to bring the accounting & finance expertise, as well as the processing, needed to complement your existing lease administration system or integrated workforce management tools. Keep the aspects of your current process which work well – real estate, space & energy management, facilities maintenance, capital projects etc. – supplemented with an accounting engine that is purpose-built for IFRS 16 /ASC 842 compliance.
The Lease Accounting Engine will:
- Integrate and standardize high volumes of required lease data from lease management systems and offline data stores across the organization; interacts with revenue recognition solutions when necessary.
- Provide flexible rule templates addressing various lease accounting scenarios like lease classification, identification of lease modification and accounting for down/advance payments.
- Generate books & records quality financial information with full audit trail.
- Generate the required daily journal entries for the thousands of business and accounting events that can happen over the lifecycle of the lease – which may exceed 4,000+ journal entries monthly / lease.
- Support both lessee & lessor accounting business processes.
Where do I start?
The new leasing standard will require changes to how organizations account for operational leases – and it won’t necessarily be easy. Almost 80% of respondents to a survey conducted by Deloitte stated that compliance with the new standard would be ‘difficult.’ Most advisors are encouraging companies in the heavily impacted industries, including telecommunications, to begin their impact analysis and start exploring the solution options available to them.
Our team at Aptitude Software are already speaking to some of the largest Telecommunications companies about how we can help them drive compliance without disrupting the current lease and finance architecture. We look forward to helping your organization as well.