In early 2016, FASB issued its new leasing standards with the objective of bringing better transparency to the financial statements of companies, specifically with respect to the representation of leases. Although, this move will be beneficial to stakeholders in the long run, such major changes to the financial statements bring challenges. Most of these issues can be overcome by ensuring that the IT infrastructure of your organization is updated and ready to comply with such new guidelines. A task many IT teams would classify as “easier said than done.”
Updating/reprogramming/reinstalling the IT infrastructure involves quite a bit of effort. The task includes implementation of new systems and internal controls along with other varied activities including data gathering, data validation, data migration, testing and deployment. Other related systems, like asset management and accounting, could always demand their own upgrade or changes. It’s best for companies to chart out an implementation roadmap which will help them identify and chalk out the activities involved in this process and the time involved for each such activity.
It is important to note that public companies must include at least three years of information in their financial statements to meet the new standards. That means, if your organization has a substantial lease portfolio, you will need to effectively transition your accounting process in 2016 itself to become fully compliant by 2019, which is when the FASB leasing standards are set to apply.
As mentioned earlier, there are innumerable challenges with respect to implementation of these new guidelines. In our post “Finding the Budget for FASB”, we covered many of the financial and other operational hurdles the new standards might bring. In this post, we are aiming to concentrate mostly on the IT challenges that will be involved in implementing these mandatory measures. This can help give you and your organization a fair indication on whether or not you are on track for your FASB compliance goals.
Data Gathering
Don’t automatically think that your previous lease inventory spreadsheets have done this job for you. FASB requires a lot more information on your leases than previous years, so it’s very possible that you will need to gather more information. When gathering and analyzing the lease data, coming up with a timeline can be helpful. Depending on the number, nature and complexity of your lease portfolio, the task of data gathering involves considerable time, effort and resources (both human and financial). Be sure to set aside time to take a closer look at your lease portfolio to identify and evaluate the different types of leases – especially, embedded and sub leases, since they too will need to be recognized on the balance sheet under the new standard.
Considering the enormity and effort involved, you will need to decide between assembling an in-house team for the data abstraction and data entry task and outsourcing the same to a third party service provider.
Data Validation
This is an extremely important (but lengthy) process since it involves testing the lease data quality – both for completeness and accuracy. This can be done by comparing a specific percentage of lease data, say 10-20%, with the original paper records to ensure that all necessary data is captured and is correct. If the tested data is complete and accurate, then it will be safe to migrate the entire lease data from the existing system to the new FASB compliant software. The other option is to manually abstract the lease data, which again is a tedious process in itself, and depending upon the time and cost constraints can be outsourced to a third party provider.
Data Migration and Testing
Once the data is collected and tested for its integrity, the next step would be to migrate it into the new FASB compliant RE/FM software application. Again, it is better to load only a specific percentage of the verified lease data into the alpha system and test its functionality and ensure that the system is working properly as was envisioned.
Simultaneously, your implementation team would be conducting various tests like, checking for bugs in the source code (unit testing), the new system’s compliance with the specified requirements (system testing), any inconsistency in integration of the software with other related modules (integration testing) like asset management software, financial modules and so on. But the testing process will be complete only when people from your team test the alpha system and certify it to be fit for deployment (user acceptance testing).
Deployment
The next step involves the installation of the production version of the lease accounting system and transferring all the lease data into it. This again involves both time and resources you will want to account for early on when you are defining the scope of the project.
It is only after the completion of these steps that the lease accounting system will be ready for business use. These steps apart, it is essential that the organization employ adequate controls to mitigate any kind of data or accounting risk to the organization. A continuous monitoring and assessment of the system throughout the implementation process becomes an absolute necessity.
As can be seen from the process overview, implementation of a new lease accounting software comes with its own share of operational challenges – not to mention, the vast amount of time involved. It’s estimated that the entire process –from data gathering to deployment, might take as many as 24 months, thereby making the choice of a lease accounting system all the more significant right now. It’s also incredibly important that you find a trustworthy implementation team who can help spearhead the complex task and usher your organization toward FASB compliance.
At ValuD, our team has worked with multiple clients to prepare them for the shift in lease accounting standards. We fully believe that the industry leading IBM TRIRIGA can provide the perfect solution for all matters related to FASB compliance. Our experts at ValuD are ready to help you through the entire process and ensure that you are on track for your FASB compliance goals. Reach out to us at sales@valudconsulting.com and FASTSTART your way into FASB TODAY.
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