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2018 Changes in Lease Accounting: What does this mean for your organization?

By Adam Sanderson

A change in the accounting for leases as required by ASC 842 necessitates that public companies will be required to include all leases with terms greater than one year on their balance sheet for reporting periods beginning after December 15, 2018 for public companies and for reporting periods beginning after December 15, 2019 for private companies.

WHAT DOES THIS MEAN FOR ORGANIZATIONS?

Book Assets and Liabilities to the Balance Sheet

As a result of ASC 842, leases must be booked to the balance sheet in the form of a controllable asset and a corresponding liability. Additionally, corresponding journal entries must be made relating to all leased assets. Therefore, the lease accounting processes will need to withstand an audit and thus will require rigorous, standardized processes with controls.

New Financial Statement Disclosure Requirements

There are at least 11 requirements for the new quantitative and qualitative financial disclosures under ASC 842.

WHAT EFFECTS WILL THE NEW STANDARD HAVE?

Organizational Impact

Companies will be challenged in maintaining their current disparate lease procurement, accounting, and lease management processes. Multiple departments within an organization will need to come together and define standard processes and data that span the entire organization. In 2017 and 2018, organizations will be required to prepare for compliance with the new requirements by implementing company-wide lease management systems which calculate and produce the monthly and quarterly accounting entries and disclosures.

Implementation Hurdles

The implementation process will be both resource exhausting and expensive. Most companies will be required to license a new software solution to do the bulk of the quantitative requirements associated with the new standard. Hundreds of additional journal entries based on complex amortization tables will be required to accurately account for the additional assets and liabilities.

As part of the software implementation, a company will be required to consolidate lease data for all its existing leases. If the company has structured data, a project must be undertaken to extract data from existing systems and to map it to the lease accounting solution. If the company has unstructured data, the organization must extract and map data from the actual contracts itself.

Dacarba has experience in implementing software solutions and driving required organizational change to help with the lease accounting transition.