With the implementation of ASU 2016-02 (Topic 842, Leases) rapidly approaching for private companies and not-for-profit organizations, companies should forge ahead on the road to compliance. The new standard applies to both lessees and lessors and it brings significant changes to balance sheets. The extra time granted by the FASB reflects the mammoth task ahead, which will require more work, more resources and more time than most businesses realize.
Related Read: Topic 842 Basics for Lessees
Before you even get started on the process, you will want to ensure your accounting team has been educated on the new standard and understands its implications across the organization.
Related Read: New Leases Standard – What Do Lessors Need to Know?
STEP 1: Identify Your Lease Population
- Understand the new definition of a lease.
- Identify your known lease population.
- Review your contracts and other agreements to identify previously unknown leases, including embedded or in-substance leases.
- Work with local offices, plants, distribution centers, etc., for information on leases that they may have as well.
- Compile a listing of your total lease population, including significant lease terms such as lease payments, term, options to renew or cancel, and initial direct costs.
- Document procedures performed to identify your complete lease population for your auditor.
STEP 2: Technical Analysis and Assessment
- With your full lease population in mind, determine your policy elections and practical expedients.
- Decide on one of the available transition methods and consider discussing these approaches with your financial statement users, stakeholders and peer organizations, if relevant.
- Modified Retrospective Type 1: Under this approach, you are adopting the new lease accounting standards as of the earliest period presented in your financial statements.
- Modified Retrospective Type 2 (Effective Date Method): Using this method, you will adopt the new lease accounting standards on the effective date. Your balance sheet and prior period disclosures will show accounting based on the old standard applied to the previous years.
- Assess whether your organization’s existing systems, internal controls and processes are adequate or if new systems and tools are required.
- Draft a lease accounting policy white paper outlining your policy elections and practical expedients and how they impact your financials.
- Discuss lease policy decisions with your auditor.
STEP 3: Lease Calculations
- If your assessment has determined that lease accounting software will be necessary for your implementation, review vendor options, finalize software selection and start the set-up process.
- Using data from your total lease population, upload lease details into lease accounting software or run calculations to determine appropriate entries.
- Consider business process changes that need to be made for the organization’s internal control environment around data entry, authority to enter contracts and review.
STEP 4: Data Validation
- Run a manual test on a population of leases to ensure that technology and software systems are accurate.
- Run applicable historical transactions through new systems and business processes to calculate the effect on prior periods or the cumulative effect upon adoption date.
- Allow time for your auditor to test your restated accounts or cumulative adjustment.
- Prepare new disclosures and ensure auditor concurrence.