ASC 842 will put additional pressure on companies to collect lease data that is not typically present under the current state of lease accounting. The new rule means that the calculation of right of use (ROU) assets and liabilities must be regularly refreshed each period that payments are made. These new journal entries, as well as new disclosures mandated under ASC 842, will require entities to review their current process and methods of data storage for leases and determine whether they can address the new requirements or need another solution to address data gaps.
As mentioned in the previous post, the fact that many companies use manual spreadsheets to track lease information poses an efficiency problem. An additional concern is that if companies elect to maintain a manual process to adopt ASC 842, additional calculations must be done for each lease—to determine the ROU assets and liabilities; to determine certain aggregate data, such as weighted-average remaining lease terms and discount rates; and to reconcile undiscounted cash flows over the next five years and the total thereafter to the ROU liabilities.
While continuing to maintain a manual process is certainly an option, companies should keep in mind that it may be more time-consuming than initially anticipated to build working models through spreadsheets to support the ROU assets and liabilities. Once you develop the models, you will have to periodically gather data in aggregate from those spreadsheets to capture the information needed for lease disclosures. Think about the level of effort it takes to pull together lease disclosures for annual financial statements as well as footnotes under current rules, and then imagine doing that each quarter in the period of adoption for additional data. Certainly not a pleasant thought!
Alternatively, companies may decide to explore various vendor technologies available in the marketplace that help address the transition to ASC 842 and that can serve as an integral part of the monthly close process. Although more costly than using in-house manual processes, these technologies come from vendors with broad experience that can provide insights on similar issues seen from other clients. This does not mean companies can stay hands-off and expect a smooth transition, however. As with any new system implementation, companies will likely encounter unexpected results (such as underestimating the time and resources devoted to implementation) or limitations that will need to be addressed (such as understanding how the system interacts with your ERP system or understanding if the system will scale with your needs).
Finally, in addition to required quantitative data, certain qualitative disclosures must be made regarding the basis and existence of certain terms and conditions. Most companies don’t currently track that information in the lease population, but must now review their leases to determine if these requirements are applicable. Most companies will have to perform a review for these qualitative items at the adoption date, as well as for any new leases post-adoption, and determine a method to track this data, whether on a manual basis or through a vendor solution.
