Earmark CPE

Earn CPE Anytime, Anywhere

ASC 842

Why Traditional Tools Fail Under ASC 842—and What CPAs Can Do About It

· ·

Are your lease accounting tools holding you back? Here’s how to bridge the gap and streamline your financial close process.

CFOs, Certified Public Accountants (CPAs) and finance teams are facing unprecedented challenges in lease accounting, especially with the complexities introduced by ASC 842 and IFRS 16. Traditional tools like spreadsheets are no longer sufficient for managing the intricate details of modern leases. Imagine trying to generate a journal entry report for 2,000 leases and it takes five hours—every single month! This is not just an inconvenience; it’s a crisis that threatens the efficiency and accuracy of financial reporting.

To help CPAs navigate these complexities, Greg Kautz shared his insights on an Earmark webinar. Here is a summary of the key takeaways:

Recognizing the Limitations of Traditional Tools

Before 2019, lease accounting was straightforward—track the general ledger coding, payment amount, and vendor. However, with the implementation of ASC 842, CPAs now have to manage an expanded scope of data, transforming lease accounting into complex asset management.

“Now, you’ve got to start tracking the lease name, commencement date, date of return, classifications, and payment schedules,” says Greg. Each lease requires meticulous tracking of multiple data points to ensure compliance and maintain audit-ready documentation.

Spreadsheets and basic software can’t keep up with:

  • Complex Payment Structures: Leases may have multiple payment components requiring different accounting treatments.
  • International Operations: Multi-currency leases introduce foreign exchange complexities.
  • Consistent Application of Key Inputs: Inconsistent incremental borrowing rates across leases can compromise financial statement accuracy.

Navigating Modifications and Reassessments with Confidence

Modifications and reassessments under ASC 842 are particularly challenging. CPAs must maintain accurate audit trails and ensure that changes apply to the correct periods—all while meeting tight month-end deadlines.

“Some companies have deferred so many modifications they’re approaching materiality thresholds,” warns Greg. This situation is even more complicated for organizations dealing with both IFRS and US GAAP requirements.

Key challenges include:

  • Updating Incremental Borrowing Rates: Ensuring rates apply to the correct period without affecting past calculations.
  • Retroactive Adjustments: Making accurate entries for closed periods without reconstructing entire datasets.
  • Audit Scrutiny: Auditors are increasingly focusing on lease modification processes and documentation.

Embracing Scalable Lease Accounting Solutions

The limitations of outdated tools become glaringly apparent as organizations scale. Waiting hours for journal entries is not sustainable from legacy lease accounting systems.

“Companies recognize their systems are inadequate but hesitate to change due to perceived implementation complexity,” notes Greg. However, modern lease accounting solutions can be implemented quickly and efficiently.

Essential features of scalable solutions include:

  • Rapid Processing: Handle large lease portfolios without delays.
  • Accurate Retroactive Adjustments: Process changes affecting closed periods correctly.
  • Multi-Currency Support: Manage international leases seamlessly.
  • Robust Audit Trails: Maintain clear documentation for compliance.
  • Scalability: Grow with your organization’s expanding lease portfolio.

Practical Steps for CPAs to Overcome Lease Accounting Challenges

To effectively overcome these challenges and enhance your lease accounting practices, consider implementing the following strategies:

  1. Centralize Your Lease Inventory: Maintain a centralized database accessible to all stakeholders.
  2. Be Proactive with Modifications: Update lease changes as they occur, not just at month-end.
  3. Leverage Automation: Utilize advanced software to reduce manual errors and save time.
  4. Standardize Discount Rates: Ensure consistent application across all leases.
  5. Plan for Reassessments: Regularly review leases for upcoming modifications or renewals.
  6. Stay Audit-Ready: Keep documentation organized and accessible for auditors.
  7. Invest in Training: Provide ongoing education for your team on lease accounting standards and tools.

Transform Your Lease Accounting Process Today

The technology gap in lease accounting is a significant risk to financial reporting accuracy and efficiency. CPAs can’t afford to rely on inadequate tools that jeopardize compliance and drain valuable time.

“There’s always a hard way and an easy way to do accounting,” says Greg. “Sometimes it’s achieved through technology, sometimes through better data, sometimes through better processes, and most times it’s a combination of all three.”

Don’t let outdated systems hold you back. By embracing modern solutions and proactive strategies, CPAs can bridge the technology gap and master the complexities of modern lease accounting.

Watch the full webinar featuring Greg Kautz’ expertise and practical demonstrations for more in-depth insights.

From Modifications to Abandonments: A Deep Dive into ASC 842’s Most Complex Scenarios

· ·

Adopting ASC 842 has completely updated lease accounting, presenting CPAs with a brand new set of guidelines for accounting for the various changes made to a lease agreement over its term. In a recent webinar, Jaron Moss, a CPA and technical accounting consultant at FinQuery, and former auditor, delved into the intricacies of applying ASC 842 to various lease scenarios, highlighting the challenges CPAs face in ensuring accurate financial reporting and compliance.

This article explores how the new lease accounting standards impact the day-to-day work of accountants, some of the complex scenarios encountered, and the skills and knowledge needed to navigate these complexities effectively.

Lease Modifications and Reassessments: Adapting to Changes

Lease modifications and reassessments are common scenarios that require CPAs to apply their understanding of ASC 842 to ensure accurate financial reporting. As Jaron Moss explains, “A modification is a change in the terms and conditions of a contract that results in a change in the scope or consideration of a lease. Essentially, you go to the lessor, renegotiate the contract, and you get a new contract. That’s a modification or amendment.”

Modifications involve changes in lease terms, while reassessments occur when the lessee’s facts and assumptions change without renegotiating with the lessor. Accounting for modifications and reassessments differs in terms of:

  • Reallocating consideration
  • Reassessing lease classification
  • Updating discount rates

Navigating lease modifications and reassessments requires a deep understanding of ASC 842 and the ability to adapt to changes in lease contracts.

Partial Lease Terminations: Two Approaches to Consider

Partial lease terminations present another complex scenario CPAs must handle in accordance with ASC 842. These occur when a lessee reduces the leased assets to a lesser amount. Accountants must be aware of two approaches for accounting for partial terminations:

  1. Adjusting the right-of-use asset (ROU asset) proportionate to the change in the lease liability
  2. Adjusting the ROU asset proportionate to the change in the asset itself

Calculating adjustments to the lease liability and ROU asset, and a gain or loss on the partial termination requires a thorough understanding of the different approaches to ensure accurate accounting.

Lease Impairments and Abandonments: Identifying and Accounting for Complexities

Lease impairments and abandonments are complex scenarios that require CPAs to apply judgment and knowledge of ASC 842 and related guidance. “When a lease impairment is recognized, the carrying amount of the lease is adjusted downward to its recoverable amount, which is the higher of the fair value less the cost of disposal or its present value of future cash flows,” explains Jaron Moss.

Lease impairments occur when the recoverable amount of a leased asset falls below its carrying amount. Lease abandonments occur when the lessee stops using a leased asset before the lease term expires without the lessor’s consent. Accountants must be able to identify and account for lease impairments and abandonments appropriately. Leveraging technology allows CPAs to handle complex calculations more efficiently and focus on providing value-added insights.

As Jaron Moss states, “Keep in mind, using a tool is one of the best ways to handle these types of complex lease changes, so you don’t have to spend your time on these tedious, complex calculations. You can focus on the areas that add more value to your organization.” 

Those looking for a tool to assist with the complexities of lease accounting and compliance should consider the solutions offered by FinQuery.

Embracing the Future of Lease Accounting

The adoption of ASC 842 has significantly impacted the accounting profession, requiring CPAs to stay up-to-date with the latest guidance and best practices. Accountants who can effectively navigate lease accounting complexities will be better positioned to serve their clients and organizations in the post-ASC 842 landscape.

To gain a deeper understanding of the complexities of lease accounting under ASC 842 and learn how to navigate these challenges effectively, watch the webinar recording.