How Contract Management Software Helps with FASB Lease Accounting Standards

You know it’s been coming for a long time. On January 1, 2019, the new lease accounting standards from the Financial Accounting Standards Board (FASB) will take place for public companies (2020 for private companies). While it may seem that day is still far away, the reality is that the necessary processes to apply the new guidance on how to reflect operating leases with terms greater than one year on your books take time and plenty of preparation.

Whether you’re a lessor or lessee, now virtually all leases will be reflected on the balance sheet. Let’s review what are key steps to prepare for the new accounting standards before the mandatory effective date of January 1, 2019 (or 2020) hits.

  1. Break Into The Filing Cabinets

In a survey of 9,006 respondents, PriceWaterhouseCoopers found those responsible for leasing accounting are most concerned about capturing data about all leases. This is particularly true in enterprises still managing leases with paper-based systems or with a backlog of old leases lying in a dusty cabinet somewhere. It is imperative to prepare an inventory of paper-only lease contracts and consider leases that may be embedded in other contracts.

  1. Centralize Storage of All Leases

PriceWaterhouseCoopers found that 48% of those responsible for leasing accounting use spreadsheets as the primary system for tracking leases and lease accounting. While this is a good start, it should be temporary. There are many reasons why Excel is not enough for contract management, including the inability to extract key data from contracts (more on that in a just a bit) and the high probability for uncoordinated inventory of leases.

Additionally, a centralized storage of leases needs to allow you to organize all contracts and facilitate the search of supporting documents. The Contract Logix Express Solution allows you to organize all contracts and supporting documents for more efficient access, from one centralized electronic repository.

  1. Ensure All Legal Documents Are Catalogued and Labeled for Audit

The Express Solution from Contract Logix doesn’t just allow you to record all lease data in central location, but also meet the toughest compliance requirements by providing a complete audit trail of all changes made to contract records and supporting documents. Contract management software automates several of the necessary processes for compliance. Given the rising compliance costs, a contract management system helps streamline those processes and not add extra burdens.

Remember that “the auditors are coming!” and having a systematic way to approach new leases and catalogue old ones is key to making the audit process as smooth as possible.

  1. Extract Key Lease Data

The new FASB standards require you to examine potential regulatory and tax implications by calculating how recorded amounts might impact regulatory metrics. This means that you will need to pull a lot of data from your lease contracts.

Unfortunately, most enterprises don’t have the ability to extract key contract data. Contract Logix surveyed 550 U.S. individuals who are responsible for the creation, editing, and/or management of contracts at manufacturing companies. 63.84% of those respondents reported an inability to extract key data from contracts. A similar statistic can be found in the business services industry.

This is an expected roadblock when using subpar contract management solutions, such as email, spreadsheet software, or paper-based system, to handle contracts.  Transmission of information isn’t automated and requires somebody to manually pull key contract data, increasing the chances of errors.

Take for example, the tax accountant working the Magellan Fund who had to transcribe the net realized loss from the fund’s financial records to a separate spreadsheet and forgot to include the minus sign. This error went unnoticed and carried on to several interconnected spreadsheets resulting in a calculation error to the tune of $2.6 billion!

  1. Search for Embedded Leases in Other Contracts

On top of accounting for contracts clearly labeled as leases, there may be leases embedded in other contracts. It’s not unusual that a large enterprise may have additional leases not accounted for in various service contracts, logistics agreements and even data center/co-location arrangements.

Another advantage of a CLM solution is the ability to perform text searches across the entire contract database. This is a great help when seeking to capture all embedded leases in other contracts, reducing time and maximizing efficiency. A robust CLM solution also makes scanned documents text-searchable through OCR software. Here is another reason why a centralized contract database is essential so that no contract is left behind and that all contract data becomes available enterprise-wide.

Takeaway

The new FASB standard for lease accounting was issued in early 2016 and the effective dates of implementation are January 1, 2019 and January 1, 2020 for public and private companies, respectively.  As these dates draw near, auditors will undoubtedly notice improper lease accounting if no action is taken. The ramifications of a failed audit are dire: a potential stock exchange delisting for a public company, a lower credit rating, or an overall damage to an enterprise’s credibility and reputation.