Lease accounting implementation insights: Lessons learned en route to adopting ASC 842

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A recent PwC survey found that only 1% of companies had completed adoption of the new lease accounting rules. For the other 99%, we offer some lessons learned to date from companies that have already made substantial progress with their implementations to help smooth the path forward.

Implementation of the new lease accounting standards typically includes three phases (see diagram). Click the tabs below to take a closer look at what is involved during each of these phases.

This timeline is provided only as an example. Your actual timeline may vary, based on your circumstances.

Components of a three-phase implementation

Phase I – Impact assessment and data preparation

Laying the groundwork for an efficient implementation might involve a survey of existing leases and business requirements, workshops to educate stakeholders and an assessment of data completeness.

Don’t delay assessing the current landscape of your leases and your available lease information. Depending on the completeness and accuracy of your lease data, this process could require a multi-departmental effort spanning several months.

60% of the companies we surveyed cited difficulties identifying their lease population, and it’s easy to see why—many organizations need to collect and manage data from thousands of leases and related documents, such as amendments, schedules and asset listings. Frequently, companies uncover gaps: missing information about leases, missing leases held by subsidiaries or a need to digitize leases that exist only in hard copy.

If missing data needs to be abstracted from source lease agreements, ample time and resources are needed. Manual lease abstraction is extremely time consuming and error-prone, and many companies are using technology to help accelerate the process and increase accuracy.

Finally, remember that auditors will want to understand how companies reached their determinations, so a well-planned and auditable approach to gathering data and assessing completeness is essential.

Phase II – Designing the path forward

This phase includes determining whether a new lease management system is needed and vendor selection for any new system requirements. With 53% of public companies and 25% of non-public companies expecting significant system changes to accommodate the new leasing standards, choosing the right lease management system is key. This decision will be particularly time sensitive for many companies—70% of public and 57% of non-public respondents in our survey expected to go live with system changes after their effective date.

The number of available lease management systems has increased since the release of the new accounting guidance, complicating decisions. To avoid becoming overwhelmed by so many options, some companies are considering only vendors that offer end-to-end lease management, accounting and standardized reporting. Others are considering vendors that may offer limited functionality, rather than end-to-end lease management. Creating a more targeted list of candidates saves precious time needed to implement a solution before the deadline.

When evaluating system needs, consider the range of potentially impacted stakeholders. For example, income, property, real estate and sales and use tax personnel may need additional data and/or functionality from the leasing system. Unfortunately, many lease management systems are not designed to produce tax reporting. Given the overlap of data needs, we have found that some companies are considering broader system integrations to run more efficient compliance and planning functions.

In addition to system solutions, consider which processes and controls—from formal governance structures to standardized lease management across the organization—will be necessary to support compliance and ongoing operations. Defining roles and responsibilities for the new lease operating model is also crucial.

Phase III – Transforming leasing operations

This phase includes four sub-components:

  1. Preparation (2-3 weeks) focuses on project planning and alignment. Responsibility and accountability for each required activity should be assigned to relevant stakeholders and discussed to help build consensus.
  2. Design and build (8-14 weeks) includes developing requirements and policies, creating key design and process design documents, building the system and running test cases. Sequencing is crucial: to reduce the risk of rebuilding, begin building the system after the design is completed and approved. Investing the resources needed to assemble a complete lease data set and to build real world test cases will pay significant dividends over the long run.
    • Key insight: Process designs may need additional controls, depending on the technology configuration and historical treatment. Examples include how A/P will be transacted and reconciled, consideration as to whether historical capital leases are in the fixed asset system and how the new deferred tax liabilities will be reconciled.
    • Key insight: Depending on the implementation timeline, additional manual processes for all or part of the lease portfolio calculation may be required. Companies considering manual bridge solutions like spreadsheets will need additional controls.
  3. Testing covers data migration, regression testing, user acceptance testing (UAT) and training. Be aware that system defects or failures may inhibit testing and extend the testing period. Thoroughly test and review accounting to determine that accurate and verifiable reports can be produced.
  4. Finally, stabilization focuses on go-live support.

How PwC can help

PwC offers companies deep and integrated expertise with respect to adoption of the new lease accounting standards, and the many impacts on business models. We can help evaluate and implement a wide range of solutions and process changes to address affected areas including accounting, systems, processes, controls and tax, to name just a few. We look forward to discussing how we can help you navigate the adoption of this new standard.

*Source for statistics cited throughout: PwC’s 2018 accounting change survey.

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