Financial Accounting Standards Board’s Accounting Standards Codification (FASB ASC 842) and the International Financial Reporting Standards 16 (IFRS 16) are the first major updates to lease accounting regulations, and the changes are significant. With the regulatory pressures already placed on financial institutions, it’s critical to find solutions that enable you to ensure compliance, and fit lease accounting into your day-to-day routines.
There’s good news, if your transition is handled properly, your accounting department will operate more efficiently and effectively. The key to reaping these benefits is to invest in the best lease accounting software for your needs.
Key features and functionalities
There are a variety of contenders in the lease accounting software marketplace. Ultimately, you need to choose a solution that has the functionalities required for compliance available and ready to use on day one. These features fall into four main categories:
System intelligence
The software you choose should be able to perform complex calculations without any additional configurations on your end. For instance, if you choose to elect one of the practical expedients released by the boards, the software should be able to apply that election company-wide to prevent inconsistencies.
Financial institutions tend to have a large volume of real estate leases, and some of those agreements may stipulate that payments are based on contingencies, which is known as contingent rent. A compliant lease accounting software should provide the total rent, inclusive of contingent rent, while also ensuring that contingent rent is never included in your lease liability or right-of-use asset.
Data integrity
With leases going on the balance sheet, you need to ensure that you have internal controls in place to prevent errors. This is especially important for publicly traded companies, which must adhere to Section 404 of the Sarbanes-Oxley Act. Choose a software that has functionalities that require each task to be verified by someone other than the person who performed it. You should also be able to track who changed a lease, what they changed, and when.
Another way to preserve data integrity, particularly for decentralized organizations, is through duplicate prevention functionalities. For example, one accountant may enter a lease as “Corporate Headquarters,” while another may enter it as “Corporate HQ.” The software needs to have a function that recognizes a potential duplicate and prevents it from being introduced into the system.
International considerations
If your organization has leases in countries outside of the U.S., your lease accounting software must be able to accommodate multiple currencies. In order to perform currency translations and re-measurements, it should be able to store transactional currency, functional currency, and reporting currency. Without it, you won’t be able to perform re-measurements, which are required under ASC 842.
Accounting and operational tools
In addition to system intelligence, lease accounting software should also have features that enable you to operate more efficiently and effectively. For example, keeping all lease documents in a centralized, searchable repository drastically reduces the time it takes to locate a particular file. This is something that many accounting departments don’t currently have access to because they don’t manage lease documents.
Another operational tool the software should have is the ability to alert you of lease deadlines and renewals. These notifications prevent you from incurring unnecessary costs by reminding you of when leases lapse, as well as the timing of payment increases and renewal options.
SOC reports
Beyond software functionalities, you should also ask for the vendor’s system and organization controls (SOC) report. It’s one thing for a mistake to be caused by human error. It’s another thing when errors are created due to software glitches. That’s where SOC reports come in. SOC reports are provided by CPA firms that test a company’s software and make sure it performs as intended.
Expertise
Some lease management and accounting software companies have made tweaks to their existing tools in order to market them as lease accounting solutions. However, when you take a closer look at what they’re offering, you’ll find that they lack the expertise required to properly interpret the standards and deliver the functionalities required for compliance.
A truly robust software should be built and supported by accountants with lease accounting expertise. Ask potential vendors how many specialized lease accountants they have on staff to support you through implementation and day-to-day lease accounting. You should be able to rely on them to help you understand the more challenging aspects of the new standards.
The bottom line
Choosing to invest in a new software is not an easy decision. However, you’ll find that it’s a worthwhile one. The time you spend on a thorough selection process will pay off later in terms of your ability to comply, operate more efficiently, and prevent costly errors.
Read this blog for more information on how to compare lease accounting software solutions.
