By: Ben Cotlar
Does your company have a significant number of leases? Are you required to apply accounting under Accounting Standards Codification 842, Leases (ASC 842)? If so, you may want to explore purchasing software to assist with accounting for those leases. Lease accounting software comes with purchasing costs and requires time to fully acclimate and learn the technology. In this blog, I will share with you some of the advantages of using lease accounting software versus preparing manual lease calculations. The following information will help you decide whether purchasing software will simplify accounting and financial reporting for your leases.
Less Time Consuming
The adoption and implementation of ASC 842 will have varying degrees of impact for different companies and industries. Because of this, you may have received emails from vendors of numerous accounting software options and could have likely heard a pitch or two; you may have even participated in a demonstration. However, it is worth questioning whether the additional cost for software is beneficial compared to simply using excel spreadsheets.
Endeavoring to adopt ASC 842 without lease software will involve a host of manual calculations for every individual long-term operating lease. Historically, we’ve only needed to disclose the future minimum payments for operating leases. ASC 842 requires these payments to be aggregated at present value into short-term and long-term lease obligations. The corresponding right-of-use asset will be adjusted downwards or upwards for existing deferred rent or unamortized initial costs, respectively.
Simplifies the Complex
The new lease standard comes with so many intricacies. If you prepare the lease calculations manually, this will entail setting up an amortization schedule for accretion of the lease obligation and the calculations will need to be performed for both the adoption date (for applicable adoption disclosures) as well as the year-end date. ASC 842 also expands the required disclosures to now include the weighted-average discount rate and the weighted-average remaining lease term, disaggregated by lease classification. These calculations don’t take very long to calculate manually, but they are extra calculations to keep in mind. I estimate the time to prepare lease calculations manually is approximately two hours per operating lease, only if you are well acclimated with ASC 842.
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If you choose to perform the calculations without software, you’re increasing the chances of something being accidentally overlooked. There are many nuances in the standard such as: acceptable discount rates, definition of commencement date, extension options reasonably certain to be exercises, residual value guarantees, etc. By using a spreadsheet, an error in any one of these inputs could result in incorrect journal entries and footnote disclosures.
Ultimately, I think it really boils down to the sheer number of leases and the volume of related calculations, accounting entries and disclosures. Based on my experience, once you have three or more operating leases, then the time saved by using a software product to account for your leases will outweigh the cost of that software. In summary, lease accounting software not only saves you time, and effort by simplifying the complex, but also increases your accuracy. If you have any questions as you adopt the new standard, don’t hesitate to reach out to me!
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