Our article ‘How to assess the impact of ASC 842 Leases on a UK entity when reporting to group’ gave an introduction to ASC 842 leases and suggestions on how UK subsidiaries may assess the impact of ASC 842 on their leases when reporting to their US parents.
The initial application of ASC 842 leases can be a daunting task, both technically and for the resource capacity that may be required. Below we look at some of the tools and services available to make this process feel more achievable, with a focus on finding an appropriate solution to record data and calculate the relevant accounting entries.
Accounting for leases by a lease - a summary
Leases accounted for under ASC 842 give rise to a right-of-use asset and a lease liability.
ASC 842 retains a distinction between operating and finance leases. The total cost expensed to the profit or loss (interest and depreciation) in respect of the operating lease is unchanged from the amount expensed to the profit or loss under ASC 840. This is achieved by adjusting the amount of depreciation to ensure the charge in the profit and loss account is consistent.
The lease liability is calculated by discounting the present value of future lease payments. The standard requires the discount rate used is the rate implicit in the lease (RIIL). However, if the RIIL is not readily determinable the lessee’s incremental borrowing rate shall be used.
Lease accounting software and models
Having a lease accounting model or software solution plays a key part in the application of ASC 842. The right solution will depend on your requirements and the volume of leases you have.
RSM has analysed the market to determine the capabilities of many solutions, currently in the market and in development, to meet the requirements - as well as handle other components of lease administration.
Our strategic relationships with several key software providers allow us to discuss software options with you. We can assist with the implementation of the chosen solutions to help with data aggregation, data cleanliness, and support that will drive the timeliness and success of the lease data collection effort.
Whether it be software-based or a workbook, it is important that your lease accounting solution provides you with everything you need.
Key considerations when choosing your solution may include:
- Operational tools
Does the solution offer role-based access, locked journal entries, central repository, and alert notifications?
Where does the responsibility of maintaining the solution lie? How often will the solutions be updated?
- Data integrity
Does the solution offer data entry validation? Does it provide lease change history and prevent duplication?
- Accounting intelligence
In addition to calculating the right-of-use asset and lease liability does the solution recognise the application of practical expedients and provide useful life charts?
Does the solution deal with the transitional adjustments and considerations as well as the ongoing accounting?
Does the solution automatically provide you with the journal entries you need? Are these journal entries available on a monthly, quarterly, annually basis?
Can the solution report key information in an effective format giving a clear audit trail?
Does the solution include specific reporting functionalities enabling periodic reporting by lease, legal entity, business unit, asset class, and/or currency, on a periodic and year-to-date basis?
- International considerations
Does the solution offer IFRS transition methods, or multicurrency and translations?
- Volume of contracts
Can the solution handle the number of contracts you have? Is the functionality of the solution excessive for the number of contracts you have?
How does the cost compare to the benefits that you value? Would you be paying for functionality that you would not use.
- Advanced reporting
Does your solution produce disclosure reports for all compliance standards?
- Operational tools
How RSM can help
Our team has the experience and expertise to:
- help you understand the impact of implementation on your group reporting; and
- identify, collate and analyse the data required to help you determine what GAAP adjustments if any, you need to make.
In addition, we can:
- develop an implementation plan to ensure a smooth and cost-effective first year with effective onward capabilities;
- assess whether your existing systems will be able to cope with the implementation of the new standard and advise on a selection of software vendors and solutions;
- establish an appropriate business process and system of internal control;
- provide incremental borrowing rate valuation support; and
- assess the impact of any modifications to the lease terms and how they will be accounted for.
For further information please contact Nicola Whitmarsh, or your usual RSM contact.