Everything You Need to Know about Lease Accounting Software

Chapter 1: Why are spreadsheets ineffective for the new lease accounting standard?

Introduction

Many companies do not have processes and systems in place today that will enable them to effectively manage all of their lease agreements under the new lease accounting standard. Spreadsheets worked in the past because operating leases weren’t on the balance sheet and financial statement disclosures were limited.

This approach may not work going forward as operating leases are added to the balance sheet, primarily due to the challenges of extracting, organizing, maintaining, and reporting on lease data at adoption and beyond. There is a need for different internal controls and better documentation for initial accounting and subsequent changes.

Accountants often default to using spreadsheets, but spreadsheets are risky. There is ample opportunity for error in many areas (e.g., inputs, formulas, importing data, using macros), plus the potential for issues with access control, version control, and how the outputs are used. In this section, we will highlight the risks of using spreadsheets for implementation.

Use this guide to help clients understand the risks of using spreadsheets to implement the new lease accounting standard.

Data collection is challenging in spreadsheets

A successful implementation checklist starts with understanding and accumulating the necessary lease data. It is essential to consider how to handle data collection. 

One of the first steps—and one of the significant implementation challenges—is creating an inventory of necessary data points for all existing leased assets. Within each lease, contract provisions must be reviewed and assessed for their accounting implications. Then, processes must be established for this to happen on an ongoing basis. Certain data required for accounting calculations, such as fair market values, economic lives of assets, and discount rates, will come from sources other than lease contracts. 

Lease information within many organizations is usually not centralized in a single database. Real estate leases are typically maintained separately from other leases, and equipment and vehicle leases may be decentralized across the organization and tracked on multiple spreadsheets and in paper files. Under prior lease accounting requirements, a single company-wide application may not have been needed. With the new lease accounting standard, that all changes. 

The new lease standard’s scope is broader than the previous lease standard—not because the definition of a lease has materially changed, but because excluding leases, such as those embedded in service or other contracts, can result in a material misstatement on the financials. More agreements must be reviewed and analyzed, additional data will need to be gathered from existing service and outsourcing contracts, and documents stored today on paper or in image format may not be easily uploaded.

There are many new required financial statement disclosures—both quantitative and qualitative—that will require obtaining and maintaining new lease data. Also, the accounting team needs to maintain documentation to support assumptions made and calculations performed during the lease accounting process. This documentation will be required for the external auditors during the annual review or audit process.

Spreadsheets waste time, money, and resources

In general, spreadsheets take longer to design and maintain and are less reliable than CPA software solutions. 

The team that is responsible for accounting and reporting will need to create new spreadsheets for lease accounting general ledger data entry, journal entries, notes to financial statements, and management reporting. They will need to have extensive training on the details of the new lease standard to design the form and functionality of these spreadsheets in compliance with the standard. 

Once created, spreadsheets will have to be checked for accuracy and updated for changes on an ongoing basis, taking up more staff time. Journal entries must be created using potentially erroneous spreadsheet data.

Enforcing workflows and versions in spreadsheets is challenging and limits efficiency. Further, as spreadsheets get larger, they are increasingly cumbersome to use. Maintaining and sharing current spreadsheets is further complicated when multiple users are inputting data. 

Because they slow down the closing and reporting process, spreadsheets end up costing your clients more money instead of saving it as intended. Significant human resources can be required for preparing, revising, correcting, and consolidating multiple spreadsheets across an organization. There is also a potential cost to the company of using disconnected spreadsheets for management reporting or producing inaccurate data for financial reporting.

Is Lease Accounting Software More Accurate than Spreadsheets

CPA software is developed, programmed, tested, and regularly updated, which simplifies compliance with complex accounting calculations and reporting. Software functionality can validate formulas and ensure that all calculations and formulas are systematically and consistently applied. Accounting software is tested for quality, and formulas cannot be accidentally changed by users. Lease data entered once is available consistently across all functions and reports. Detailed audit trails are available to know when data is changed, and by whom. Calculations and the manipulation of large amounts of data happen much faster than they would if performing the same functions in spreadsheets. These internal accuracy controls are critical features for implementing the new lease standard.

Chapter 3: How Should CPA Firms Choose Lease Accounting Software?

Companies preparing to adopt the new lease standard are dealing with decisions now about whether or not they will need to implement a new software solution. There are many providers of lease accounting software in the marketplace. While most software has the necessary basic functionality, some also offer unique solutions and capabilities. 

It is important to analyze the firm’s objectives and budget to make the right choice when evaluating lease accounting software. The lease accounting software comparison process will require thoughtful planning and research. Below are some of the most important features firms should consider when evaluating which lease accounting software is best suited to an individual firm and its clients.

What to Look For in Lease Accounting Software

Compliance with the new lease standard’s accounting and disclosure requirements is the first priority for any software selection. There may be FASB (ASC 842), GASB (GASB 87 & GASB 96), and IASB (IFRS 16) requirements to consider because even smaller clients might have to comply with both if they have international subsidiaries. Consider a chart of account capabilities, including the ability to customize account numbers and descriptions that match each client’s chart of accounts and journal entry formats. Your clients will need functionality to prepare lease amortization schedules that tie out to the accounting system. This includes all required accounts (e.g. right of use assets, short-term and long-term lease liabilities, interest expense, amortization expense, etc.) and journal entries. Also, assess the ease of generating monthly journal entries and importing those journal entries into the accounting systems.

Accounting policy decisions and elections must be made at adoption, monitored on an ongoing basis, and be clearly documented. Evaluate how the software can simplify these elections and facilitate documentation and communication of these policies to all users in future years.

Financial reporting

To handle the new financial statement lease disclosure requirements, look for CPA software that can perform all required quantitative calculations. Also, evaluate whether these calculations can be performed for any combination of leases. 

For ongoing management reporting, determine whether the software is flexible enough to report on different types of leases required. Ideally, all data should be exportable into a spreadsheet format. Also, ask whether the CPA software offers the ability to save various custom reporting configurations so that the same reports can be run every month. Reporting capabilities should include both standard and customizable reports.

Why waste your time doing all the calculations and tracking when someone else did all the work and created this for you, at a great price?

– Jeremy, Regional Bank Controller

Lease functionality

To meet the needs of many different clients, consider whether the software can handle all lease types. If the software focuses on solving the problems of one industry, like real estate or equipment, make sure it can adequately address the needs of other asset types. 

Because the starting point is a review of the lease documents, the ability to attach these documents is an important feature. This includes not only the original lease documents, but also modification and change justification documents over the life of each lease. In addition, consider the ability to add notes to the lease record, such as explanations of why a certain decision was made, to support the related accounting decisions and calculations.

Scalability

Your clients may have a small or very large number of leases, and these numbers may change over time. Additionally, the complexity of the terms and provisions in their leases may vary greatly. Evaluate the software’s capabilities as it relates to the number of users and the size of the lease portfolio. Also, consider what the options are for the software to expand with the number of and type of leases.

Accuracy

The migration of existing client lease data into the selected CPA software is an important early activity in the implementation checklist for new accounting software. It is important to understand how that data will be controlled and checked. Also, determine whether the software has built-in capabilities to ensure lease data is entered correctly, like validations and wizards, along with tooltips and hints integrated into the software so the user has access to the right information exactly when they need it. Consider whether users will have to perform certain calculations outside of the software, and what controls the software has to ensure the accuracy of calculations. The internal controls at the software provider level are an important consideration, so ask whether a Service Organization Controls (SOC) report is in place or in process.

Audits and reviews

Assess how the software can improve audit effectiveness, simplify quarterly reviews, and help mitigate fee pressure. If there are built-in audit trails and transparency into the software’s functionality, it will make your work on transition and Day 2 accounting more efficient. Ask the vendor how their CPA software can maximize your firm’s audit efficiency, by reducing the number of overall audit hours required and facilitating your ability to use less-experienced associates for lease data entry.

Hardware and software

Ask vendors about the hardware and software associated with their solution, and how it can be integrated with your firm’s systems and your clients’ existing accounting and ERP system configurations. Understand the vendor’s ability to meet potential future needs, including software upgrades and bug fixes. Depending on your firm’s needs, determine if the vendor offers software as a service (SaaS), with anytime access from anywhere and no hosting requirements. 

Pricing is always an important consideration, because the software you select must be cost effective for all client types and sizes. Prices from different vendors may vary depending on how they price their software—whether it is based on the number of users or the size of the lease portfolio, and whether a standard bundled package is offered or there is separate pricing for each additional feature selected. Be sure to understand upfront costs in addition to ongoing fees.

Training and technical support

Given the time remaining until adoption, it is important to minimize the training required and to try to decrease learning curves. Evaluate how intuitive the software is to use, including whether users are provided with the information they need to accurately enter lease data and run reports. Ask whether any free training is provided to various user groups as part of the software implementation process, whether it is performed onsite or via online meetings, and whether additional training can be purchased if desired. Also determine whether or not there is ongoing technical support, a help desk for users, and whether there are accounting experts available to assist.

What to Ask When Evaluating Lease Accounting Software Vendors

Selecting the right software for the transition to the new lease standard is challenging. No system will likely meet every user’s needs, but you can use the questions below to assess your requirements and make an educated choice.