What CFOs Need to Do to Prepare for the New Leasing Standards

The movement of operating leases from the income statement to the balance sheet is a fundamental shift for accountants.

The introduction of any new accounting standard tends to be followed by plenty of gnashing teeth in the accounting profession. The introduction of a set of new standards around lease accounting will be no different.

This standard, ASC 842, comes into effect for private companies from December 15, 2021. And as tends to be the nature of new standards, it brings with it a host of new compliance challenges.

Modifications to the existing lease accounting standards in ASC 842 include:

  • Inclusion of operating leases on balance sheet
  • Right of use asset impairment
  • Application of lease modification
  • Evaluation of transactions

The movement of operating leases from the income statement to the balance sheet is a fundamental shift for accountants.

For those not familiar with ASC 842, it dictates that operating leases are no longer considered expenses, but right-of-use assets and lease liabilities, located on the company’s balance sheet.

This will apply to all statements going forward, but must also be applied retrospectively to the company’s previous accounts.

The new requirements will serve to increase the burden on accountants in the short term, particularly as many will already be dealing with the fall-out from the Covid-19 pandemic.

In fact, the introduction of the standard was delayed as a concessionary measure. The delay of the new standard will have been welcomed: Some estimates put the average time of going through a lease contract under the new standard at close to two hours.

Lessening New Work Loads Caused by ASC 842 Update

Make no mistake: This is a headache for CFOs, controllers, and auditors alike. Recognizing this, technology firms have stepped up to the plate.

Chief among them is Trullion that in a timely addition to the market has created artificial intelligence-powered software that aims to lessen the load of accounting professionals that have to deal with the new leasing standards.

Trullion uses a combination of optical character recognition (OCR) and machine learning to analyze lease contracts in detail. Readers from an accounting background will already be taking note.

This removes the need for them to trawl through endless pages of text, first to find the relevant part of the contract, and then to interpret what it means in terms of the corresponding journal entry. 

As it does this, it provides the accountant with full visibility of the process. The relevant sections of each pdf or Excel-based contract are highlighted and outlined separately.

Better still, the AI component of the software allows it to interpret these data with respect to ASC 842. So, it’s not just an annual percentage rate, but it’s also what impact that interest rate will have on the company’s balance sheet.

Chasing the Clock to Achieve Compliance

In addition to this data extraction capability, Trullion also has a reporting function. Once extracted, the individual terms of each lease contract can be applied to the relevant section of the accounts.

CFOs, auditors and controllers can then easily see where the changes have been made, filtering down to the relevant contract and seeing disclosure broken into their finance and operating components, all in full compliance with ASC 842.

This also represents a leap forward for auditors. The journal entries created provide them with visibility of the source of every journal entry.

Viewing the journal entries in Excel format, they not only can access the original lease contracts but can also see the formula underpinning the numbers in the Excel sheet.

Thus, the software promises to be a timesaver for auditors as well as a company’s internal finance team.

Also, every modification to the document is tracked. Trullion allows users to see all historical changes made to each document, giving visibility of and access to, every version of the document that has been created.

In the same way, the document’s owners can convert the document to a read-only financial record, or reconvert it to an editable document as soon as a requirement for changes arises.

With the clock ticking on the implementation of ASC 842 in private companies, the fundamental shift involved in moving operating leases from the income statement to the balance sheet is bound to generate confusion in the short term as the profession adapts.

Trullion, and other software platforms like it, promise to alleviate some of the intense workloads that await everybody in the accounting profession.

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