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Not Always Necessary to Buy Software to Adopt Lease Accounting Rules, FASB Panel Signals

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

Not all companies need lease accounting software or vendor assistance to adopt the lease accounting standard because straightforward contracts can be easily done via an Excel spreadsheet, a FASB advisory discussion said.

Private companies should weigh the complexity of their leases as opposed to the quantity of leases they carry in their implementation of Topic 842, Leases, members of the Private Company Council (PCC) said on April 21, 2022.

The rules take effect this year for private companies, many of which will start that process this summer.

“What I’ve found with the private companies and some of them are relatively small is it’s more about the lease complexity than the quantity,” Jeremy Dillard, a partner with SingerLewak LLP, said. “I’ve seen clients where they have 50 copier leases and they’re all boilerplate and they’re very straightforward and they’re able to manage that all in Excel,” he said. “I have other clients where they have seven real estate leases that have lots of modifications and quirky terms in each lease where the software becomes very helpful and to try to do it in Excel would be problematic.”

Related to cost “what I’ve seen because we were looking at lots of software packages out there is there’s an initial cost for the software licenses as well as they charge a per lease cost,” Dillard added. “And then the pricing varies depending on the volume of leases you’re going to be looking at but in general ballpark you’re looking at a minimum of several thousand dollars,” he said.

Software vendors do not always get the accounting right and therefore careful thought needs to be given to the issue, another PCC member said.

“I’ve seen some very, very sophisticated Excel spreadsheets with macros and inputs that someone spent a lot of time on they could probably handle a lot of situations better,” Adam Roark, director, assurance innovation and methodology at Dixon Hughes Goodman (DHG), said. “There are also software vendors out there that weren’t getting it right when we did our initial valuations but hopefully most of them are there now,” he said. “But just the fact that it is a software solution doesn’t really mean it’s going to be correct so I think careful analysis has to be taken regardless of the approach.”

The PCC is the panel that works with the FASB to develop private company accounting rules. The discussion comes as the FASB is conducting a post-implementation review (PIR) of Topic 842 to determine whether it worked as intended. The standard requires companies to report the full magnitude of their long-term lease obligations on the balance sheet – a historic first in the U.S.

An issue to consider when trying to determine which route to take is who is giving the advice – i.e. whether it is a software seller, FASB Vice Chair James Kroeker suggested.

“Jeremy [Dillard’s] comments are similar to input we got two years ago from the [Small Business Advisory Committee],” Kroeker said. “Certainly some software packages handle the modifications through the system although you’re still going to have to track that data and of course you had to do that pre- [Topic] 842 as well,” he said. “I think modifications were an area of complexity in the existing lease accounting model so [bringing] that degree of skepticism of who’s telling you you need to buy something and is there a better way.”

Generally more complex leases would be best served with software and vendor help as there are financial reporting implications that a company may not be aware of, the discussions overall indicated.

“Having gone through the first round of disclosures I think we probably even underestimated even a little bit the challenge of getting all the data pulled together for some of those things like weighted average remaining terms, useful life, the reconciliation of future undiscounted payments to your liability on the balance sheet,” Douglas Uhl, principal team leader, corporate accounting policy at Chick-fil-A, Inc., said. “So there are some things that even with a system were probably a little bit more nuanced than we probably gave it credit for.”

 

This article originally appeared in the May 4, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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