by Lucas Russell | 2021-06-24
The financial reporting requirements of the new lease accounting standards IFRS 16, ASC 842, and GASB 87 are no walk in the park. Is lease accounting software the solution?
You could argue the changes to the new lease accounting standards IFRS 16, ASC 842 and GASB 87 are the most significant accounting change since the implementation of accrual accounting. That might be a bit of an exaggeration but there hasn't been such a significant, far-reaching regulatory change to one individual accounting standard that will impact so many companies worldwide. Both the IASB and FASB have made it a priority to target off-balance sheet transactions. This new lease accounting standard ensures all lease accounting transactions in the scope of the applicable standard end up on the balance sheet.
Under the new lease accounting standards, all operating leases must be recorded on the balance sheet, similar to a finance lease under IAS 17 and a capital lease ASC 840 by a lessee. Anyone familiar with accounting with those two previous lease classifications will realize this requires present value calculations which are a timely exercise.
That's because these calculations are based on the future cash flows at a point in time. The present value of these payments is now referred to as the lease liability. If those cash flows change, e.g., a fixed payment increase from the lessor, the cash flows need to be updated. This is only the tip of the iceberg to modification accounting. To do it correctly requires an intimate knowledge of the standard.
So far, we've only mentioned the lease liability. At the same time, the lessee needs to account for a right of use asset in conjunction being the debit entry at initial recognition of the lease. To reiterate this is for every lease. Most lease modifications, which are changes to contractual terms, will impact the value of both the lease liability and right of use asset.
Some companies may be acutely aware of these nuances if they've had to account for a lease manually. The requirements of the standard are not relaxed for disclosures, such as having to split the lease payments between principal and interest.
Given these complexities and many more, lease accounting software is available that will automate all of the required calculations, journal entries, financial reports, and disclosures. This provides an alternative to maintaining at the very least two Microsoft excel calculations of the right of use asset and lease liability if a company has one lease.
If you are unclear regarding the requirements of the new lease accounting standards, the following articles provide some further information:
In this article, we'll explore the positives and negatives of adhering to the new lease accounting standards IFRS 16, GASB 87, and ASC 842 either manually or using lease accounting software. The particular lease accounting standard a company needs to adhere to depends on your financial reporting requirements.
If compliance is mandatory, a company has two options when adhering to the new lease accounting standard. For many, the most familiar option will be to perform the required calculations manually in excel. As any accountant can attest to, a lot of accounting is done in excel. This would be no different.
The alternative is lease accounting software. This is a new concept. First of all, the software will perform the present value calculations. Secondly, the software will be able to generate the journal entries and all the financial reports. So what's the best option?
The positives of complying with the lease accounting standard manually are:
So what are the negatives if a company were to opt with calculating the lease liability and right of use asset manually:
For anyone opting to calculate a lease manually, you mind find these following articles helpful:
The positives of complying with the new lease accounting standards IFRS 16, GASB 87, and ASC 842 with the use of lease accounting software are:
The majority of the solutions in the market price per lease managed, meaning the more leases you have the higher the subscription costs. For more information to help determine what lease accounting software is most appropriate for your company's financial reporting requirements, refer to the following article Lease Accounting Software Selection Guide.
If lease accounting software was free and easy to use, there's no reason why every company should not use it to perform their lease accounting. That's based on the assumption that it's accurate, reliable, and easy to use. The benefits of using lease accounting software far outweigh those compared to complying with either ASC 842, GASB 87, or IFRS 16 manually.
The biggest driver if a company should use lease accounting software will be its portfolio size. The greater the portfolio size, the more manual time it takes, So what's the number of leases to manage manually?
A simple return on investment can help calculate this. Let's say a senior accountant is the preparer of the calculations and the financial controller reviews, and the company reports internally each month. The company has one lease and will account for that lease manually:
|Time spent on manual compliance|
|Task||Hours per annum|
|Understand the requirements of the standard||7|
|Prepare lease liability and right of use calculation||7|
The above total hour estimate does not factor in the following:
Let's assume the staff cost is $100 per hour, which is a blend of the senior accountant and the financial controller's cost to the company. So to prepare one lease costs the company $2,600 in the first year and then $1,200 annually.
This is a quick back-of-the-envelope estimate, but it does give an indication of the time it costs the company when complying manually. By doing so provides a good indication of when lease accounting software is a worthwhile investment. In this example, if a company can procure lease accounting software for $1,200 or less a year to manage one lease it's a positive return on investment.
The analysis performed concludes the benefits of using lease software far outweigh adhering to the lease accounting standard manually. The most significant inhibiting factor is the cost of the software. Each company will reach a threshold where the cost for a company not using software will outweigh the subscription price of the software. This will likely vary from company to company. Using the example above, even just one lease a company could justify using accounting software.
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