New Lease Accounting Standards Are Coming…Are Your Systems Ready?
By D. Scott Beave, Sr. Product Marketing Manager
Tuesday, April 6, 2021
After a year’s postponement, new lease accounting standards will take effect in December 2021 for private companies and nonprofits operating in the U.S. Under ASC 842 and IFRS 16, long-term leases must now be captured on the balance sheet. This is a significant change and makes accounting for leases much more difficult. Gathering and organizing lease data can be time-consuming, especially if the original documents aren’t centrally located. Performing the numerous calculations involved and ensuring the results are accurate is just as challenging.
Applying the new ASC 842 lease accounting rules requires careful planning and the right tools. If you haven’t begun the process and are considering a manual, spreadsheet-based approach, you might want to reconsider. Other companies have tried this and struggled to comply.[i] Fortunately, we can learn from their experiences. Spreadsheets have many limitations and relying on them for lease accounting creates unnecessary risk.
The Risks and Limitations of Spreadsheets
Complexity: While ASC 842 will increase financial transparency, which is good for investors, it presents many challenges for accountants. A long-term lease will now appear on the balance sheet as both an asset and a liability, the latter representing the current value of future lease payments. Lease amounts must be amortized over the life of the agreement, with the expense separated into two parts: a lease fee and the interest charge. The percentages used to calculate the fees are highly variable and must be considered on a lease-by-lease basis. How a lease is treated depends on the structure, components, and term of the agreement, the value of the asset, and many other considerations. Spreadsheets are simply the wrong tool for dealing with this degree of complexity.
Accuracy: Accountants need accurate data to do their job well. Overreliance on spreadsheets and manual processes, however, can get in the way. Data entry is one of the most common sources of mistakes. Transposing two numbers or miskeying a single digit can lead to overpayments, liabilities being under-reported, and other potentially costly mistakes, including tax penalties and fines.
Security: Spreadsheets are inherently insecure. Cells can be locked to prevent changes and workbooks can be password protected, but these features only work if enabled. This should be common practice, but it isn’t. Even if it were, however, security would still be an issue. Spreadsheets are often shared among peers, especially when collaboration is required. And sharing a protected file means sharing the password as well. This defeats what little security these applications provide. This is an open invitation to risk.
Accountability: In addition to the security risks mentioned above, when multiple people have access to a single spreadsheet, it’s nearly impossible to hold anyone accountable if there are errors. Data logs are a common feature of enterprise accounting software and provide a complete record of every activity performed by anyone with access to the system. If spreadsheets had this capability, entries, edits, and deletions would be easy to track. Unfortunately, they don’t. And while some have a “track changes” feature, this capability is rarely used and can be disabled by anyone with access to the spreadsheet.
Functionality: Spreadsheet applications are used extensively in finance and accounting. They’re important, some would even say indispensable, tool. But despite their utility, there are many things they simply can’t provide. The data logging limitations mentioned above are just one example. Spreadsheets also lack a number of other important features relevant to lease accounting, including:
- Document management – Signed lease agreements should always be backed up with electronic copies. These should also be available for review when needed, but like all legal documents, access should be carefully controlled. Accomplishing both requires document management and security features that spreadsheets don’t offer.
- Automated alerts – Forgetting to renew a lease can be expensive. The lessor may demand higher rates or offer the asset to another party. Keeping track of renewal dates is easy if you only have a handful of leases. It’s harder when there are dozens. A system that automatically reminds you to review leases before they expire can be a lifesaver. Spreadsheets don’t have this functionality.
- Integration – Spreadsheet programs aren’t designed to integrate with other applications. The data they contain must either be uploaded or manually entered into the accounting system. This added step increases the risk of errors, especially if data entry is required.
Automate the Lease Accounting Process
NetSuite automates the lease accounting process, saving time, reducing risk, and improving the accuracy of financial reports. Using NetSuite, accountants can easily document new and existing leases from across the organization, including other locations, business units, or subsidiaries. Centralized access to lease records, including electronic copies of signed documents, allows authorized personnel to review or update lease details on the web or from a mobile device.
Businesses need to apply standard amortization schedules or create a custom schedule for any lease. NetSuite automatically posts the expense to the general ledger, separating the monthly rental fee from the interest charge using the appropriate percentages for each lease. Asset value and lease liability are also updated simultaneously, giving you an accurate, real-time view of the balance sheet.
Automated alerts even remind you of upcoming renewal dates or if lease options are about to expire. NetSuite simplifies lease accounting, helping ensure compliance with the US and global accounting standards and allowing your team can focus on other tasks.
[i] Publicly traded companies were required to comply with ASC 842 for fiscal years beginning after December 15, 2019.