For many organizations, adopting and complying with the new lease accounting guidelines is now one of their biggest challenges. However, in a 2018 survey of more than 2,000 finance leaders by Robert Half and Protiviti, over 55% of respondents said they had not begun the transition. It has been widely documented that the new standards will place greater demands on the capabilities of lease accounting technology, and it is clear that many existing systems may need to be updated, or even replaced altogether. To help ease your path to choosing a solution that can meet the substantial challenges and increased reporting burden imposed by the new rules, we’ve put together a list of 10 essential questions you should ask before selecting a system.
1. Has the software solution been validated by a Big 5 or Big 6 global accounting firm?
To be sure of being able to perform the complex calculations, capitalizations and detailed year-end footnote disclosures required under the new rules, you must be able to rely completely on a system that has been independently pressure-tested from a recording and reporting perspective.
You must ask whether your proposed system has been audited and validated by a major independent accounting firm that has been providing advisory services to Fortune 100 companies for many years—not just a firm that is simply riding the current Lease Accounting wave.
2. Is the software solution delivered in a cloud-based, Software-as-a-Service (SaaS) format with SOC 1 and ISO 27001 data security certification?
You need to be sure that the solution you’re considering has an effective capability for lease accounting computations that meet the new standards set by FASB and IASB. The best way to check this is to ask whether a Service Organization Control (SOC 1) audit of the system’s IT General Computer Controls has been conducted by a major international accounting firm. You should verify that the SOC 1 audit also included testing the system’s internal cloud computing controls over financial reporting in a SaaS environment.
In addition, you should ask for confirmation that the SOC 1 testing also included the system’s data processing controls over transactional processing within its Lease Accounting functionality.
It’s also essential to check the robustness of your proposed solution’s information security system. This can be done by making sure it has gained ISO 27001 certification for its processes and procedures following a third-party audit. ISO 27001 is only awarded when a solution provider can demonstrate a fully utilized and enforced Information Security Management System (ISMS) that ensures data and software are managed to the highest-possible standard of security and confidentiality. ISO 27001 certification also proves that strict access controls are in place.
3. Does the software solution support the concurrent use of multiple subledgers to facilitate transitioning and dual reporting?
Multiple concurrent subledgers are essential for organizations that wish to adopt the guidance using the modified retrospective transition methods available for both FASB and IASB. After adoption, the availability of multiple concurrent subledgers will enable companies to report under the new FASB and IASB standards concurrently to fully support their multinational entities around the world.
4. Does the software solution provide an out-of-the-box interface with most major ERP systems?
While most companies recognize the importance (and urgency) of making system changes to ensure compliance with the new lease accounting standards, many may be reluctant to replace their back-end ERP system because of the complexity of such a task.
In this situation, it is crucial to make sure your selected software solution is pre-configured for interfaces with multiple ERP systems. Out-of-the-box ERP integration functionality will enable you to accurately map and transmit General Ledger data with the need for only minimal final configuration.
5. Does the software support both FASB and IASB as well as Lessee, Lessor and Sublease accounting?
For international companies that operate both inside and outside the United States, your software solution must be able to simultaneously support both FASB and IASB compliance in the same system. This will enable you to avoid having to support, or manipulate, multiple applications worldwide.
The software solution must also be able to support leasing arrangements from both a Lessee and Lessor perspective, including subleases and intercompany leases.
6. Does the software solution come with Lease Classification templates for FASB lessee and FASB/IASB lessor accounting?
Although this requirement doesn’t affect IASB lessee arrangements, both standards still emphasize the importance of proper classification of lease arrangements to help ensure accurate accounting and reporting. A software solution that includes Lease Classification templates will make it much easier for you to classify leases for FASB and IASB lessors and maintain compliance with the new standards.
These automated templates can also be historically archived to provide a sound audit trail for year-end audit purposes, especially for the year of initial adoption.
7. Is the system able to handle retrospective processing of lease transactions?
If trigger events are not communicated in a timely fashion, your lease system will have to process transactions in the current period and account for an adjustment to the prior periods. This important adjustment needs to be calculated and recorded in a systematic way.
That’s why it is so important to choose a solution that is capable of handling retrospective processing and posting of lease transactions. It will enable you to systematically utilize any of the three transition and adoption approaches that are available for IASB, as well as the two different approaches under FASB.
8. Does the system provide full audit trail tracking?
The system you select must have the capability to record and archive transactions systematically as well as allowing easy retrieval of the archive. This functionality will automatically provide an audit trail for all significant transactions—such as the initial lease classification, the initial calculation of NPV of Future Lease Obligation and Right of Use (ROU) Asset, the unwinding of the Obligation and Asset, and remeasurement of the NPV and ROU.
Such a comprehensive audit trail will prove invaluable during the audit of your initial year of adoption financials.
9. Does the software solution include out-of-the-box standard reports designed to meet the specific requirements of the new FASB and IFRS guidelines?
The new FASB and IASB rules place a much heavier reporting burden on lease systems—especially the need for more detailed year-end footnote disclosures related to leasing activity from both a qualitative and quantitative perspective.
Although the qualitative disclosures will differ from company to company, the quantitative disclosures are universal. This means your selected system must be able to systematically generate detailed reports with integrity to ease the year-end footnote disclosure process.
10. Can the system be implemented using “quick start” methodology?
With the FASB ASC 842 and IFRS 16 deadlines now only a few months away, time is running out for organizations that have yet to select and implement a new lease system. Unless they require extensive configuration, their best chance of achieving compliance in time is to find a solution that not only meets the essential criteria set out in our first nine questions, but also provides an abbreviated implementation cycle.
Experts warn that companies that aren’t ready to adopt and comply with the new standards by 1st January 2019 could face severe consequences for their business—including a loss of shareholder confidence if auditors decide not to issue an opinion on their financial statements or choose to deliver an adverse opinion.
You can find out more about how to ensure a smooth, risk-free transition to the new standards in our white paper, ‘Why Trimble Manhattan is the right choice for FASB/IASB Compliance’. It answers many of the key lease administration and accounting system questions that are frequently asked by organizations that will be affected by the lease accounting revolution. You can also learn more and book a live product demo with one of our Manhattan software experts here.
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