I recently wrote about the major financial reporting changes in the new lease standard and the potential impacts the changes could have on your business. When I wrote the blog, the Financial Accounting Standards Board was finalizing the standard, and it officially issued the new lease guidance on Feb. 25.
The guidance will become effective for public companies in 2019 and for private companies in 2020. This may seem like a really long time from now, but companies presenting comparative financials may need to start collecting the appropriate data starting in 2017 and 2018 for public and private companies, respectively. Furthermore, the new revenue recognition implementation is required just a year earlier.
The worst thing you could do is wait too long and become overloaded with the implementation of both of these comprehensive standards at the last minute; that is a recipe for disaster. If you still haven’t put much thought into the Revenue Recognition standard yet, it is definitely time to get on the road with it. Should you need help to plan your route, here is our roadmap.
If you have a substantial operating lease portfolio, you will be impacted the most by the new lease standard and will face the greatest challenges. The new standard, however, also represents an opportunity – an opportunity to improve your systems, develop your people, and better understand your operations. To get started, here are four basic steps you should take to prepare:
- Understand the Financial Reporting Requirements – Before you start your journey, your team needs to know the destination – the financial reporting requirements and the potential impact those requirements could have on your business. The team must also be aware of the pitfalls they must avoid. My earlier blog is a great starting point, but your team may need more details. You may want to consider sending them to appropriate training before starting the implementation process.
- Inventory Your Lease Portfolio – In a recent conversation, one of our clients mentioned that their biggest challenge will be to find and capture all of their equipment leases. Identifying all current leases can be a major undertaking, but getting a handle on your lease contracts before implementation will help determine what kind of resources you will need during the project. Keep in mind that the new standard changes the definition of a lease. Although most contracts that are leases under the current standard will still be considered leases under the new standard, that is not necessarily true for all contracts.
- Assess Your Current System Capabilities – Can your current technology collect and store all of the necessary data? Can it perform the necessary calculations for proper financial reporting, including new disclosures? Can it provide data analysis to help you manage your leased assets? Your technology may be robust enough to handle the new requirements, but if it isn’t, implementation of the standard could serve as an opportunity to invest in upgraded systems.
- Develop an Implementation Plan and Timeline – Once you and your team understand what implementation will require, the extent to which it will impact your operations, and what additional resources may be needed, it is time to put a plan and a timeline in place and get going. Make sure you are staying on top of the project’s execution and that you are adapting as necessary along the way.
As always, know that the HORNE PMM team is available if you need any additional advice or assistance.
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