- Understand ASC 842: The first step, which is the most challenging, is understanding the requirements of ASC 842. It is a radical departure from past practice. Clients must grasp changes in the definition of a lease, lease payments, initial direct costs, lease term, discount rates, and allocation of consideration to lease and non-lease components. Lease accounting software cannot help in this regard. Clients must know what data to enter into the software. Companies, particularly the smaller ones, will require external training or consultants as it is difficult to figure out the standard independently.
- Gather required data: The second step is to collect the data required to implement the standard. This data collection requires identifying all leases by reading the contracts carefully and then extracting data regarding consideration, allocation, timing, fixed and variable lease payments, and discount rates. Such data gathering requires coordination between Corporate, Finance, Treasury, Tax, Procurement, Human Resource, and IT. Whether doing this work internally or hiring implementation consultants depends on the number and complexity of leases and the lease accounting implementation budget. The length of time also depends on whether the data is already in easy to read electronic format or needs to be manually extracted from PDF files.
- Select the software vendor: The third step is selecting the external vendor for the lease accounting software. There is a range of solutions depending upon the complexity and budgets. Cloud-based solutions require little involvement from the IT department, while locally hosted solutions require close collaboration with IT. Solutions that had been on the market before ASC 842 and were retrofitted to support the lease accounting changes may take much longer to implement than those developed specifically for the new standard.
- Input data into the lease accounting software: The fourth step is to input data into the lease accounting software. If the software is well designed, employees need minimal training to use the software once Steps 1 and 2 listed above have been completed.
- Link financial reporting systems to external software: The data output from the external software must be incorporated into the general ledger software and financial reporting footnotes.
- New leases, reassessments, terminations, and modifications: The client must implement robust controls to ensure that new leases, reassessments, terminations, and modifications are correctly entered into the system.
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