Life After ASC 842 and IFRS 16 Lease Accounting Implementation: Transform Your Organization in Three Steps
Using lessons learned and best practices from your ASC 842 and IFRS 16 adoption to transform your organization in three steps.
Authors: Kenneth Woodring, Senior Manager, Risk & Accounting Advisory Services, Graham Michitsch, Senior Manager, Risk & Accounting Advisory Services
Congratulations to successfully completing your implementation of ASC 842 and IFRS 16 – Leases. The new lease accounting standard involved significant effort across organizations, impacting various functions such as accounting, finance, treasury, legal, real estate and procurement to achieve compliance with the accounting and financial reporting requirements.
Below are three areas that executives can focus on post adoption to maximize the benefits of the organization’s investment:
1. Optimize Business Processes
Many companies prioritized compliance over optimization when initially adopting ASC 842 and IFRS 16. The standard challenged many companies because it impacted more than just the organization’s accounting department. For example, companies went through the exercise of aggregating all existing lease documents and any service contracts that could have contained potential embedded leases. This usually involved consultations with other departments throughout the organization and resulted in delays in implementation, as there may not have been a central repository for lease-related documents or readily available information from vendors. This challenge provides a valuable lesson that can be applied to other areas of your organization.
The leasing process is a glimpse into a company’s contract lifecycle management capabilities. Post adoption of ASC 842 and IFRS 16, there is opportunity to optimize these functions within your organization. Conducting a thorough assessment of the current state of your contract lifecycle management to identify areas for improvement and determining whether these processes fit the organization’s requirements and maturity, are recommended first steps. Executives should be asking the following questions:
- Is there a defined holistic process for when new contracts are executed and managed throughout the entire business cycle, including cash disbursements?
- How is the related information transferred or communicated?
- What is the current complexity, maturity and effectiveness of this process’s components and workflow?
- Does the process include effective monitoring and management of vendor relationships to help ensure that they are consistently delivering value to meet the needs of your organization?
- Has the monitoring process been included in your internal control framework?
Additionally, since cash disbursements for rent payments are an integral part of the lease process, there is further opportunity to assess the accounts payable (AP) and treasury functions for efficacy.
- How mature and integrated are your cash management and treasury functions?
- Do you see weekly variances in your rolling cash forecast that are difficult to understand?
- How frequent are you evaluating supplier relationships?
- Does your company adhere to existing policy and follow a standardized cash disbursement protocol?
- Do the payments in your subledgers and support schedules match actual cash disbursements (e.g., lease payment schedules)?
Since ASC 842 and IFRS 16 impacted more than just back-office accounting, management should consider assessing the impacts of the processes changes holistically across the organization.
2. Reevaluate Software Requirements and Capabilities
ASC 842 was effective for public companies for fiscal years beginning after December 15, 2018, and IFRS 16 was effective for annual reporting periods beginning on or after January 1, 2019. As part of adoption, companies evaluated and implemented lease accounting software packages or other reporting techniques. The typical lease accounting software license ranges from three to five years, meaning that in 2023, you may be reassessing whether you selected the appropriate vendor.
This warrants discussion about reevaluating and understanding other existing software requirements and capabilities that management may have disregarded or learned about after implementation. This can be a complex and daunting process, but clearly defining and prioritizing business goals, identifying gaps and understanding available solutions will facilitate the evaluation process and result in an optimal outcome. Once a product is selected, monitor and evaluate the performance of the solution for continuous improvement.
Separately, organizations may be happy with their current solution, but may not be maximizing functionality of existing systems. Throughout the RFP process, many vendors offered Application Programming Interfaces (APIs) or other integrations and data connectivity capabilities. Many companies did not have the luxury of time to go through this iterative, yet valuable process to automate the reporting capabilities. APIs and other tools, such as Robotic Process Automation (RPA) and Optical Character Recognition (OCR), can streamline routine tasks and allow team members to focus on more strategic analyses and initiatives.
Lastly, integrating another software solution may have exposed the rigidity and obsolescence of the company’s current ERP. Management should take the opportunity to reevaluate its software ecosystem.
3. Leverage and Protect Your Data
Now that companies have had the opportunity to aggregate existing lease portfolio data, management should capitalize on that exercise by reviewing the available leasing information through data analytics. Example insights or discovery categories include total spend by vendor or location, cost of borrowing (lease versus buy analysis), lease renewal opportunities, and/or potential tax credits or incentives. Additionally, companies can expand the lease data set to include data points around overall disbursement and AP information to better understand insights around cost analysis, cash flow management, supplier analysis, compliance and invoice processing efficiency.
By using a more robust data set of vendor and payment data, management can assess valuable insights into their existing statistics, begin to understand trends within their information, and establish and measure metrics and benchmarks. These analyses can be used to evaluate supplier relationships, payment processing efficacy and help plan for future reporting needs such as Environmental, Social and Governance (ESG) reporting or emissions tracking/carbon reporting. In addition, companies should assess their existing cybersecurity protocols when dealing with related data and sharing it with third parties.
How Cherry Bekaert Can Help
Every organization and accounting department has different needs and business drivers. Whether your organization is adopting regulatory changes, embarking on complex transactions, or simply looking to mature or optimize an existing platform, Cherry Bekaert’s Accounting Advisory team can help you design and implement strategies with results in mind.
With the depth and knowledge of our experienced strategic accounting and finance professionals, let us help you extract additional value from implementing the new lease standard by analyzing and optimizing your business processes, defining software requirements and assessing vendor data to develop better insights. Reach out to your Cherry Bekaert advisor or contact our Accounting Advisory team for more information to help you along your journey.