Overcoming The Challenges Of Day Two Lease Accounting

Day Two lease accounting: the day after the Big Day

Implementing the new lease accounting standards has been compared to getting married. There’s lots of excitement (and nerves!) before the big change, and much preparation required by all parties. Everyone is holding thumbs that the new reality transitions smoothly, while not knowing exactly how things will go. There’s a massive build-up to the big day…and then the next day, reality sets in. 

That’s day two of lease accounting.

Accounting and finance teams have worked incredibly hard to ensure compliance with the new accounting standards, whether that’s ASC 842, IFRS 16, GASB 87, or others. They’ve involved key stakeholders, met with other departments, and rallied the company around the new requirements. 

But what happens now?

Changes to your processes

Now’s the time to bed down the routine. With the requirements around lease accounting becoming more stringent than was the case with previous lease accounting standards, having the right procedures and processes in place is more important than ever. 

Part of this will be ensuring that no leases within contracts are missed, especially when it comes to embedded leases. 

Another element that needs to be considered is when changes are made to existing leases. These could be considered “lease modifications” according to the new lease accounting standards, and depending on the circumstances, will have to be accounted for in a very specific way.

Similarly, disclosure requirements have changed dramatically, and more information – both qualitative and quantitative – is required around leases, much of which might not be available with a few clicks from your ERP or accounting software. So you’ll want to start gathering such information well before you would usually have started the process of closing your books. 

With the new assets and liabilities created, even something as mundane as regular journal entries need to be re-looked at. When something has been done a certain way over a long period of time, it can become somewhat robotic. That’s why day 2 of lease accounting requires everyone, from bookkeeper through to CFO, to be on their toes. 

Challenges will come up

We referenced lease modifications, and these are just one of the challenges that will have to be dealt with, as various circumstances will occur where you’ll need to consult the standard to ensure you’re compliant. 

For example, should a change be accounted for as a new lease, or as an existing lease?

There are many similar examples, and knowing the requirements of the relevant lease accounting standard will be crucial in ensuring that you’re aware of the issues, and you know how they should be handled. 

The standard itself makes reference to a number of these cases, together with the correct way to account for them, and an explanation of how and why this treatment is correct. 

Unearthing hidden benefits

With so many organizations having now experienced “day 2” of lease accounting, we’ve already seen the tremendous benefits that can be accessed while implementing the standard.

Some of these include:

Cooperation with other departments

With issues like embedded leases, a new definition of what a lease is, or lease modifications, accounting teams have found that they cannot achieve compliance alone. They have had to form alliances with other departments who are dealing with leases on a day-to-day basis, and who are better positioned to identify many of the accounting-related issues that can come up. This has resulted in greater organizational synergies, as well as a welcome appreciation for the work of accounting and finance departments. 

Discovering trends

With access to this data, accounting teams have found rich ground for analytics that can add real value to the business, and impress the non-accounting C-level audience. These insights can include what future liabilities might look like, where the company may be overpaying, comparing lease payments across departments, opportunities around financing, and a whole lot more.

Improved coordination with auditors and consultants

With new lease accounting software tools becoming available, accounting teams are now able to share data in real time with auditors, advisors, and consultants. This unlocks tremendous benefits, and cuts out much back-and-forth and other unnecessary organizational overhead. 

Moving beyond lease accounting day 2 with confidence

Unfortunately, the nature of accounting standards is that nothing is set in stone, especially when it comes to newer standards. There are constant changes and updates, and these elements typically become focus areas for auditors when a standard is relatively new. 

The key to a successful day of lease accounting is having the right tools in place to ensure that your ongoing lease accounting experience is smooth, seamless, and headache-free.

Having AI-enhanced automated lease accounting software in place is the answer. This software, created from the ground up to provide this compliant and stress-free experience, can change the way you think about lease accounting. 

Never mind hours, it will save you and your team days and free you up for high-impact, high-value activities. To find out more, book a call with a Trullion product expert today

Still Entering Contracts Manually?

Trusted by leading CFOs, Controllers & audit firms around the world.
Upgrade to Modern AI Accounting Technology.