Accounting Standards » Lease Accounting 2.0: The Next Evolution

Lease Accounting 2.0: The Next Evolution

Companies that embrace changes to lease accounting will gain considerable strategic advantage, says software group LeaseAccelerator.

IFRS 16 came into effect in January this year, meaning businesses now must report operating leases as interest and depreciation expenses on the balance sheet. This has a huge impact on the way companies manage their financial reporting, and many companies are still adjusting.

The data required for reporting must be complete and accurate, and gathering this new level of detail in a timely way from across the enterprise can be a highly complex and time-consuming process. The sheer volume of work required to collate the data from across the business within the deadline has been onerous for many. To combat this, many firms have hired additional resources, relied on copious spreadsheets (the pitfalls of which are well documented), and/or purchased new and untested basic lease accounting software packages.

Unfortunately, lease accounting is not a straight-forward tick-box exercise, even after completing the first round of reporting.  Leasing agreements are typically subject to numerous and frequent changes which must be reflected in every reporting cycle. As such finance teams are looking for ways to transition into a longer-term sustainable strategy to meet the ongoing compliance challenge, known as ‘Day 2’.  The application of advanced technology may be the only way to master the problem but to many teams, this is an unfamiliar and potentially daunting landscape.

To remain compliant under IFRS 16, companies essentially need to institutionalise their processes, policies, and controls for leasing. They will need to perfect the close process and lessen the risk of delaying earnings announcements while securing the record-to-report lifecycle to reduce the risk of a material weakness from their first post-implementation audit.

Financial controllers are starting to seek solutions which fully automate their lease management process, looking for digital solutions they can rely on for completeness, timeliness and accuracy of lease data. Lease accounting solutions that are sufficiently sophisticated to reflect centralised policies and controls, can also analyse and generate all required reporting changes while capturing the audit trail. However, there is an additional caveat: the complexity of the requirement means the software must be battle-tested and proven.

By leveraging a sophisticated and reliable lease accounting solution and fully automating the management process, companies will see significant benefits. For example, the lease accounting audit process will become fully sustainable and automated; finance teams will no longer need to manually gather data from the widely dispersed asset owners, or to physically identify every change to each individual lease agreement across the enterprise.

A smart lease accounting platform is designed to fully automate the process of stakeholder communication using a defined workflow and alert structure, constantly capturing and recording all the changes that occur to leases and their underlying assets over the lifecycle as part of the monthly close.

Emails are generated with automated forms, interpreting and recording the responses, and creating audit trails. Furthermore, a platform which has been built from the ground up for this purpose will have a true lease accounting subledger that automates the application of judgements and decisions based on consistent policies and advanced logic.  This level of automated accounting is dramatically more advanced than anything which has been seen before; it can be thought of as a new era in lease accounting – ‘Lease Accounting 2.0’.

Lease Accounting 2.0 delivers additional advantages. For example, collating data in a centralised database has provided finance departments with enhanced insight into their lease process, making the application of corporate strategies more effective and allowing for the reallocation of human resources away from transactional roles to enhanced strategic roles. Robotics embedded in the lease communication tool provide timely and accurate accounting and reporting of modification and reassessment events with the granularity required by the ROU asset owner.

The automation of the leasing process will deliver unsurpassed economic benefits to the finance function, but also to the procurement process, opening new avenues for business growth. Companies which embrace this evolution in lease accounting will gain considerable strategic advantage in an increasingly competitive marketplace.

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