Client: U.S. Public Corporation
Requirement: Project Accounting Services
Business Situation:
The client is a U.S. public corporation that deals with manufacturing for commercial, industrial, aerospace, and defense markets. The required implementation date for the new lease accounting standard (ASC 842) is rapidly approaching for all publicly traded companies (1/1/2019). A lot of small to mid-sized companies have not had the internal resources to spend on this endeavor and they are now finding themselves under the gun as they prepare for the approaching deadline.
While the theory is straightforward in that all leases will now be capitalized to the balance sheet, several additional factors must be considered when planning and preparing for the upcoming implementation. For example, in addition to their assessment of known leases, companies must also consider whether any other contracts allow them to control the use of assets used to complete the contract. If such assets exist, this contract is considered to contain an “embedded lease.” If you require your supplier, as part of a purchase contract, to acquire special tooling to produce your materials, that contract would contain an embedded lease and follow the guidance set forth in ASC 842.
As part of the initial setup and compliance (Day 1), companies must review all leases and contracts to determine their new lease asset and liability amounts. These companies will then need to implement procedures that will allow for future compliance with: monitoring, accounting, and financial reporting (Day 2). Post-implementation success requires the development of a repeatable process to consistently maintain accurate and complete lease records. Every company will want to have systems, processes, and controls in place that will stand up to an audit.
For this implementation, the client also wanted to standardize a process that was decentralized across several locations. This included overseas operations in which leases were in languages other than English.
ProNexus Solution:
ProNexus was engaged by the client to help with their implementation of ASC 842. Due to the client’s limited resources, ProNexus provided a comprehensive plan that would prepare the client for both the initial implementation (Day 1) and future compliance (Day 2). The ProNexus plan included a three-phase approach: Planning & Scoping; Assessment; and Execution. The following is a summary of the work performed during those three phases:
Phase 1: Planning & Scoping
- Established the overall project governance and project team;
- Conducted meetings to promote internal awareness of new standard;
- Set a compliance timeline;
- Coordinated meetings with the leasing stakeholders to understand their current processes, and identify individuals who possessed knowledge of any current contracts;
- Identified all areas where leases or contracts may currently be stored including but not limited to Legal, Procurement, etc.;
- Used ProNexus Contract Review Questionnaires to develop a preliminary understanding of the company’s leasing environment;
- Summarized key contract/lease accounting policies, processes, and treatment thereof; and
- Reviewed the initial scoping and project plan with the auditors.
Phase 2: Assessment
- Compiled a list of all contracts by area, identifying those that were not in English;
- Evaluated compliance with the existing ASC 840 standard;
- Evaluated the process flow for leases;
- Evaluated whether a software solution for lease management and reporting was needed and considered any possible alternatives;
- Determined the financial statement impact, materiality, and approach; and
- Evaluated the staffing requirements for the project.
Phase 3: Execution
- Reviewed and summarized all existing leases, using ProNexus Lease Summary templates;
- Reviewed all applicable contracts to determine if they contained leases, including embedded leases;
- Non-English leases/contracts were translated to English;
- Used the ASC 842 Decision Tree & a ProNexus Contract Review Checklist to determine the appropriate treatment for all leases and applicable contracts;
- Obtained agreement with auditors on technical accounting impact;
- Established and standardized internal accounting policies around leasing;
- Designed and implemented the process and system changes necessary to meet new accounting standard, including the recommendation of a lease accounting software package;
- Used ProNexus Lease Accounting Software to accelerate the implementation process and provide Day 1 calculations. Clients also have the option to use this software for all future (Day 2) compliance and reporting.
- Communicated to management the changes and impact on the organization; and
- Set up a sustainable process for managing lease data.
How can ProNexus help you with the new Lease Accounting Standard?
Contact us to learn more about Lease Accounting Advisory & Implementation Service and the tools we can provide.