Companies tasked with ensuring compliance with ASC 842 or IFRS 16 or both have a daunting challenge before them.  They must pay attention to three major areas; Data, Company Policy and Affected Disciplines, and lastly, Software.  

Towards the end of 2017, a survey by PwC/CBRE highlighted that a significant majority (66%) (of affected companies) expect to make some type of a system change, with 43% indicating they will implement a new lease management system.

Implementing a new system can be a daunting but rewarding challenge. With incomplete solutions, such as spreadsheets or disjointed applications, real estate and accounting teams will expend a substantial amount of time integrating and managing their data across separate systems during the complex countdown to compliance.

When evaluating a software solution, there are a few considerations which companies need to address in order to perform a comprehensive and effective review from a due diligence perspective.

1. FASB vs IASB: Does the software provide complete and accurate coverage from both a FASB and IASB perspective?

The FASB and IASB boards’ original mission was to standardize both ASC 842 and IFRS 16 globally and adopt a single lease accounting standard.  Unfortunately, preparer comments from both sides of the pond influenced the boards and they eventually were forced to agree to disagree on certain items.  This resulted in approximately 75% of the guidance being very similar and the other 25% being different. The treatment for Lessee leases is a classic example which jumps off the page.  Clients need to ensure that both standards are being followed and that the differences are accurate.

2. Lessor vs Lessee: Does the software support both Lessor and Lessee accounting?

Although this may seem like a no brainer, some software firms have opted to simply support the Lessee population.  This is due to the fact that the accounting for Lessor’s did not change dramatically although it did in fact require modifications in order to by consistent with ASC 606 (Rev Rec) standard.  Secondly, the accounting for Lessor’s was somewhat complicate again due to the differences between the FASB and IASB. Specifically, the FASB supports Operating, Direct Financing and Sales type classification of leases while the IASB only supports Operating and Financing classification of leases.  The detail differences hide the devil

3. Subleases: Does the solution support Sublease and Intercompany Lease transactions?

Sublease accounting are an integral part of a full solution although often overlooked by software developers.  The primary reason for being overlooked is the fact the sublease accounting requires a modification or remeasurement of the Head Lessee’s ROU asset as well as establishing a Sub Lessor entity.  Modifications in and of themselves are complicated considering the different options available to FASB vs IASB, but adding an internal Sub lessor to the mix is unachievable by many software providers.  

4, Multiple Transition Options: Does the solution support the various divergent Transition Options available under ASC 842 and IFRS 16?

The FASB guidance originally offered one Modified Retrospective transition approach which required filers to restate the 2 comparative years in the year of adoption.  Later, the Board decided to provide an expedient approach which did not require the restatement of the 2 prior years and record all of the activity in the year of adoption.  

The IASB guidance offered a full retrospective as well as 2 modified retrospective approaches which made the accounting more complicated.

Most companies will opt to adopt the transition approach which does not require restatements however after running the numbers, some Companies will see the economic soundness and comparability benefit of going back in time to restate.  

5. Concurrent Sub Ledgers: Does the solution support the concurrent accounting of both FASB and IASB on a go forward basis?

Once Companies have completed the Transition and Adoption process, some may be faced with the task of having to file their financial statements under both the FASB and IASB standards.  This situation is particularly applicable to conglomerates’ which support multinational operations.

Next Steps

If your organization is seeking a software partner to meet your lease compliance needs, we encourage you to download our white paper on choosing the right system or visit our Manhattan product page to arrange a demonstration. 

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.

“Good news for buyers.” and “A timely move”…

That’s how Verdantix, independent industry analysts, have welcomed the new user interface which is at the heart of the latest version of Trimble’s Manhattan Integrated Workplace Management System (IWMS).

Trimble’s Manhattan IWMS is a leading, enterprise cloud (Software-as-as-Service) solution for planning, managing and optimizing an organization’s real estate portfolio.

IWMS software delivers key information on everything related to the second largest item on an organization’s balance sheet – real estate. Comprehensive design provides detailed data on areas such as lease, financials, space, projects, maintenance and sustainability, all in a single system. However, as users demand more flexible, accessible and user friendly systems, it is becoming increasingly important for enterprise software vendors to invest in enhancing user interaction and satisfaction.

Today, Trimble announced the latest release of Manhattan IWMS, including a restyled user interface (UI).  Inspired by feedback from customers and leveraging Trimble user experience development best practises, the new UI has been designed to place a much greater emphasis on efficiency, ease-of-use and user productivity.

As we move the Manhattan product forward by adding functionality and modules; increasing its efficiency, and keeping its technology stack current, we can not lose sight of the usability of the solution.  More so than ever, as software evolves, new methods of navigation, application layouts, and visual components become available and with Manhattan we aim to take advantage of that. This is why we focused our version 35 release on a new user interface design that took into account the Trimble style guide, this brought Trimble’s experience to the Manhattan user interface by changing colors, fonts, icons, and layout in accordance with the Trimble guidance.

We did not stop at just restyling Manhattan we also wanted to introduce an easier way to navigate through the broad suite of real estate and workplace management functionality Manhattan offers, as well as a simpler way to organize what a user needs to use.

For example, Manhattan Version 35 provides search-based navigation for the first time. Manhattan’s new search capability gives users a much faster and easier way of finding what they’re looking for. One of many new features that enable users to interact even more efficiently with the system.

And to help increase productivity, Manhattan now uses a simple, tab-based method of organizing a user’s screen. This means users can now have an unlimited number of forms or reports open at the same time, without cluttering up their screen.

As well as a re-styled user interface, Version 35 also has a modern visual design that includes a new colour scheme, new icons and fonts, new style of field representation on forms, and a brand new logo.

Updating the Manhattan logo was an important decision. It was not just about the new UI launch, we wanted to create something specific and unique to represent the products evolution since the acquisition by Trimble and to set the system apart from the rest of the competition.

The new logo is an amalgamation of some of the key aspects – management and analysis – of the Manhattan system – combined into a logomark that is both balanced and aesthetically pleasing, and reflective of Manhattan’s pedigree.

While this post focuses on the latest changes and how they will give end-users an easier and more efficient way to navigate Manhattan and organize the tools they need, it is important not to forget that there’s a modern architectural design that is constantly being updated by Trimble’s engineers to deliver maximum system performance, as well as a continued focus on protecting client data and independent validations, such as ISO 270001 certification and Service Organization Control (SOC 1) Type 1 attestation. These changes ensure the system continues to meet the ever-changing requirements of the market and Manhattan users around the world.

If you are looking to replace your existing real estate management system or considering your first IWMS technology, visit the Manhattan page to learn more.

Today, Trimble clients were given extra assurance after its real estate & workplace solutions division announced that the Trimble Manhattan Integrated Workplace Management System (IWMS) has obtained a Service Organization Control (SOC 1) Type 1 attestation for its Information Technology General Computer Controls (ITGC), as well as various processing components. The independent audit was conducted in the United States. and UK by RSM, a leading accounting firm.

A SOC 1 report is written documentation of the internal controls that are likely to be relevant to an audit of a customer’s financial statements. SOC 1 reports are becoming an essential requirement for organizations looking for financial reporting software solutions.

In order to mitigate the added scrutiny on information produced by the Manhattan IWMS solution, which interfaces to clients financial statements, Trimble went the extra mile. The scope of our SOC 1 Type 1 report not only tested the computer controls inherent to the Manhattan application, but also included the calculations proscribed by FASB/IASB and produced by our Compliance solution.

Clients worldwide are deciding to work with Trimble and our Lease Administration, Accounting and Reporting Software, because we can back-up the functionality required with our industry-leading SaaS, ISO Certification, General Data Protection Regulation (GDPR) compliant solution. Adding the SOC1 Type 1 attestation, inclusive of the compliance calculations will continue to further separate Trimble from the competition, and ensure customers benefit from data confidentiality, system integrity and service availability.

Next Steps

If your organization is seeking a partner to meet your lease compliance needs, we encourage you to give us a call to explore the most robust and secure solution on the market. To arrange a demonstration of our Manhattan IWMS solution for FASB ASC 842/IFRS 16 compliance and beyond or ask a question please contact us.

Under the new FASB/IFRS rules, it will no longer be possible to keep operating leases off the balance sheet simply by recording them as a periodic rent expense (above the EBITA line). Instead, companies will have to show them on the balance sheet as an obligation and its related right of use asset. It will also be necessary to record interest and amortization expenses (below the EBITA line).

If your organization is affected by the new rules, you must ensure that you are fully prepared for these dramatic changes. Before you take your first steps on the hazardous journey to FASB 842/IFRS 16 compliance, you need to be certain that you fully understand the potential pitfalls you might encounter along the way.

The new guidance will not affect all organizations in the same way. But if your company has a large portfolio of complex leasing arrangements, you’ll probably have to introduce substantial operational and system changes in order to comply with the new standards. This will potentially disrupt many functional areas within your business — including corporate real estate, financial accounting, financial planning and analysis, financial reporting, tax, treasury and technology.

There will be financial risks too.

The new FASB/IASB leasing model will have a significant impact on your organization’s financial metrics and ratios because of the changes that will affect your balance sheet and income statement. This is likely to have a profound effect on your company’s overall capital structure (including leverage, liquidity ratios and return on investment). It could also have a bearing on your firm’s credit rating.

To make sure your organization isn’t put at risk by the new lease accounting standards, we’ve highlighted 10 key mistakes you should try to avoid.

1. Closing your eyes to the shape of things to come

If your company leases real estate, vehicles and equipment, don’t underestimate the impact that the new FASB ASC 842 and IASB IFRS 16 leasing standards will have on your business. Your approach to lease accounting and financial reporting — and even the necessary capabilities of your accounting technology — will never be the same again after December 15, 2018 (FASB) or January 1st, 2019 (IASB).

That’s why it is so important to take steps NOW to prepare key departments such as financial planning and analysis, financial reporting, tax, IT, and human resources for the future shape of lease accounting.

All of these departments need to be made aware that compliance with the new FASB/IASB standards will require a more systematic approach to the way lease data is collected and extracted in future. You’ll also have to integrate data management and reporting systems, improve processes for sharing data across multiple business functions, and make certain determinations for accounting purposes.

It’s also important to recognize that the new standards will make lease accounting functions much more complex. That means your lease administrators will have to rise to the challenge and enhance their level of expertise.

2. Not being aware of the risks of noncompliance

Experts warn that organizations that heavily utilize leasing of real estate, vehicles and equipment could face severe consequences if they’re not ready to adopt and report under the new lease accounting standards by January 1st, 2019 at the latest.

It will be essential to perform a thorough impact assessment as soon as possible to make sure your organization is fully prepared for the significant changes to the makeup of your income statement and balance sheet from either December 15, 2018 (FASB) or January 1st, 2019 (IASB).

If you fail to comply in time, the levels of risk range from having to bear the cost of additional audit fees in order to get past the 2019 audit, through to auditors refusing to issue an opinion on the company’s financial statements … or even delivering an adverse opinion.

If your company is publicly traded, such a negative report card from your auditors could lead to the potential loss of shareholder confidence or an exodus of investors. In the worst-case scenario, your company could end up being delisted by the stock exchange that trades your shares.

3. Not forming a cross-functional compliance team

With the FASB 842 and IFRS 16 deadlines now only a few months away, it is imperative to establish a cross-functional project team to oversee strategic planning and execution for compliance.

At an absolute minimum, your compliance team should comprise key people from financial accounting and reporting, corporate real estate, financial planning and administration, procurement, and IT — along with representatives from other business functions that will be affected by the lease accounting changes.

Compliance team members should be tasked with thoroughly reviewing your existing lease accounting processes, identifying the changes that need to be made to comply with the new standards, and then defining and adopting updated accounting policies.

Your compliance team should also be responsible for raising internal awareness and giving all relevant staff a good understanding of the implications of the new standards.

4. Not creating a compliance project plan

Because the new leasing standards will touch many different parts of your organization, it will be essential to have a comprehensive compliance project plan (with a dedicated project manager, if possible). This plan will guide the affected departments through all of the steps they need to take to implement and comply.

The plan should cover:

  • The three phases of compliance: Preparation, Transition and Adoption.
  • The gathering of all relevant lease data.
  • Defining and implementing new accounting policies.
  • Evaluating new lease accounting systems that will help you adopt the new standards.

5. Not taking a full inventory of ALL your leases and gathering source documents

Do you know the location of ALL your current leases? To be fully prepared for the new lease accounting standards, you must create a full inventory of your leases and any lease-like agreements which may have previously been classified as a Service Agreement.

Your compliance project may be put at risk if you don’t review these documents for completeness. This thorough appraisal should encompass all original leases and all amendments, Memorandums of Understanding, and terms and conditions.

6. Not allocating sufficient resources to implement and achieve compliance

Because the FASB 842 and IFRS 16 changes are likely to affect many different parts of your organization, you should not underestimate the amount of budget needed to cover the associated costs of compliance, as well as the additional company-wide workload.

That’s why building a comprehensive compliance project plan is so important. It may identify the need for a significant increase in spending to address any shortcomings in procedures, internal controls and accounting technology.

If only limited resources are applied across each department, there is a danger that your company won’t be ready to meet the required timeline for compliance.

7. Not reviewing and improving your leasing strategy

With the cost of operating leases set to be classified as an obligation on the balance sheet from January 1st, 2019, the traditional method of using discounted cash flow to analyze lease deals will no longer provide an accurate picture of the impact on your company’s financial statements. In future, items such as lease components and renewal options will have a significant impact on the balance sheet, profit and loss, and shareholder equity.

Reviewing your leasing strategy and renegotiating your existing leases — even if they’re not up for renewal yet — could help you to anticipate and mitigate the impact on your balance sheet.

If you decide to re-negotiate your existing lease terms, it will be essential to make sure your lease accounting system is capable of managing that process and can automatically apply the new terms to the lease management process.

8. Not knowing how the FASB and IASB standards differ

Surprisingly, some people still aren’t aware that there are major distinctions between the new FASB 842 and IFRS 16 rules on several key points. For example, there’s a big difference in the way leases will be brought onto the balance sheet under the two new standards.

This will add extra complexity to compliance and will present a major challenge for some companies — especially multinational enterprises with decentralized operations that fall under both sets of guidelines. Achieving full compliance will be a little easier if you have a single, enterprise-wide lease accounting system that is able to support the differences between the new FASB and IASB standards.

9. Underestimating the new accounting and reporting requirements

In a study by Deloitte, 88% of respondents felt that the new FASB 842 and IFRS 16 lease accounting standards will place a significant additional reporting burden on all lessees of real estate, vehicles and equipment. Some observers believe there could be a four-fold increase in the amount of footnote disclosures on financial statements alone.

Simply relying on the data you currently use for footnote disclosure won’t be enough to meet the new reporting requirements.

As a result, it may be necessary to increase the efficiency and accuracy of your data storage, data collection and data abstraction processes in order to identify, compile, process and analyze all of the important lease data the finance department will require in future. And making sure you protect the integrity of your data will be more important than ever to satisfy auditors.

10. Failing to realize your lease accounting technology is not fit for purpose

The new FASB 842 and IFRS 16 standards will impose greater demands on the capabilities of lease accounting technology. Experts warn that many existing lease accounting systems may need to be updated, or even replaced altogether, because they’ve been made obsolete by the new compulsory rules.

In a 2017 survey by PwC and CBRE, some 43% of companies affected by the new lease accounting standards said they intended to implement a new lease management system to make sure they are compliant. They recognized that, to report lease assets and liabilities more accurately on their balance sheet, they may need to change the policies, processes and IT systems that currently support their lease accounting, administration and procurement.

By avoiding the potentially disastrous mistakes we’ve highlighted here, we hope your organization will have a smooth, risk-free transition to the new standards. You can find out more 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. Book a product demo with one of our Manhattan software experts.