In its latest edition of CFO Insights, Deloitte looks at lease accounting and identifies six questions that CFOs should ask their chief accounting officers. The FASB's new leasing standard, ASC 842, takes effect for public companies from 1 January 2019 and one year later for non-public organisations. But many companies are struggling to be ready in time. It requires companies to bring almost all leases exceeding one-year onto the balance sheet, and to designate all leases as either operating or finance leases.
So what questions should public-company CFOs be asking their chief accountants in the run-up to the compliance deadline?
1. Technology and systems
According to Deloitte, CFOs should ensure that their company has lease accounting software and systems in place to record and store lease-related data. Automating this system will be key to fewer mistakes in the financial statements. The company warns that systems will need to be in place and tested well ahead of the first quarterly reporting deadline at the end of Q1 2019.
2. Data gaps
The new ASC 842 standard requires companies to report on data that many historically have not captured. Deloitte says that CFOs should consider how their company is addressing these gaps, and whether an in-house lease accounting specialist has been appointed to oversee the lease abstraction process or whether this is being outsourced to a qualified third party.
3. More communications needed with business units
The leasing decisions made by business units may now have a greater impact on the company balance sheet, so more contact will be needed between finance and the operational side to ensure that all leasing decisions make financial sense.
4. Centralise leasing decisions?
According to Deloitte, many bigger decentralised firms are moving to a centralised model for lease administration and accounting. This enables companies to be more strategic about their real estate and equipment leases and is also an opportunity to use better data and analytics, to generate economies of scale and negotiate more effectively with their vendors.
5. Outsource or in-house?
Deloitte points out that: “Many companies are turning to third parties to handle lease abstraction activities, implement a new technology solution, and to manage their real estate portfolio. The quality and experience of these parties are critical to getting the accounting right.”
6. What about the auditors?
Sitting down to talk to your auditors now is good advice, says Deloitte. It adds: “Whatever new processes your organisation may be implementing, and whatever new software may be installed, your auditors need to be comfortable with your approach.”
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