FASB 842 Implementation Services - Horizon Projects...

FASB 842 Implementation ServicesThe Financial Accounting Standards Board has issued Accounting

Standards Update No. 2016-

02, Leases (Topic 842), an Amendment of the FASB Accounting Standards

Codification, which outlines changes in the way that lessors are required to

report certain monies collected for leased assets. These new lease

accounting standards – known as ASC 842 – will go into effect for public

companies January 2019 and for private companies and not-for-profits

January 2020.

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FASB 842 Implementation ServicesThese changes affect the following aspects of lease

accounting documentation:

1. Sales taxes and other similar taxes collected from lessees. ASC 842 sets

forth different requirements depending on whether the lessor is

responsible for taxes collected along with lease payments from lessee,

and therefore counts them as revenue, or whether the lessor is

collecting them on behalf of a third party, in which case they would not

be considered revenue. The new lease accounting standards require

lessors to document this information.

2. ASC 842 requires that certain lessor costs that are either paid by the

lessee directly to third parties or to the lessor as reimbursement will

now be documented as revenue and expenses.

3. Recognition of variable payments for contracts with lease and non-

lease components, specifically during the accounting period in which

the changes occur. This item is simply a clarification of the language

and intent of the requirement.


WHAT THIS MEANS

FOR YOUR BUSINESS

Businesses face heavy penalties for dragging their feet on compliance or

getting it wrong, so why take the chance? Horizon Projects Consulting

Corp. are the experts in managing programs and projects that can ensure

a smooth transition to the new system and limit your financial exposure.

Beyond our vast project management expertise, we have successfully lead

a major program for the adoption and deployment of people, process and

technology at a Fortune 500 company for the adoption of ASC 842.

In order to ensure compliance, companies that frequently use leases and

accept lease payments will need to create lease abstracts from multiple,

maybe hundreds of documents, so that key elements can be amended for

future documents. This is a lengthy and detailed lease accounting process

involving specific legal requirements. The correct information must be

identified, organized, abstracted, validated and uploaded to a system to

ensure consistency and avoid compliance errors and backtracking.

The Horizon Projects Consulting Corp. system enables companies to

correctly abstract needed information from their leases in a thorough and

consistent manner, ensuring that costly reworks are not necessary.

Step-by-Step Abstraction Process Checks and Balances1. Create Lease Abstraction Standards

2. Lease Abstraction Standards Validation Process

3. Integration with ERP (General Ledger & Accounts Payable)

4. Impacts of Process Design

5. Project Management


Step-by-Step Abstraction Process Checks and Balances

1. Create Lease Abstraction Standards

If it is to be done efficiently, the first step of any project is to agree on what

it is to be done. It is a key step to agree on standards for lease abstraction –

what information will be collected regarding identifying basic lease

information, options, fixed or variable components and lease payments for

example, and how the information will be collected.

These specific elements must be dealt with early in the project lifecycle to

establish the correct right of use (ROU) asset on the balance sheet. In

addition, it is imperative to develop these standards at the initial stage to

avoid costly rework in subsequent phases of the project. Horizon Projects

Consulting will work with your Lease Accounting team to establish

standards on information to be abstracted from all lease contracts to

satisfy ASC 842 requirements and your lease accounting standards.

Horizon Projects Consulting Corp. will work with your Lease Accounting

Team to identify standards by which lease contracts should be

established.




Once data is abstracted, it is important to validate that the required data

was abstracted correctly and consistently for all leases.

Horizon Projects Consulting Corp. will work with your Lease Accounting

Team to identify standards for evaluating abstracted data for real estate

and equipment leases to ensure it was done correctly. We will work jointly

with the team to identify lease accounting standards by which all

contracts for operating leases and other leases will be judged against the

standards created.

The result will satisfy both operational and accounting requirements for

real estate and equipment leases. ASC 842-compliant standards will be

developed to ensure the following:

• All lease options along with the effectively of each option abstracted?

• Relevant and key information is abstracted consistently for all leases.

• Payment amounts are abstracted consistently for all leases.




Beyond lease abstraction, Horizon Projects Consulting Corp. will work with

the Lease Accounting Team to create test conditions to validate that the

Lease Accounting application is calculating balances according to FASB

842 and the lease accounting standards. Additionally, we will partner

with your team to ensure that the application is configured to satisfy SOX

and internal audit requirements.

Here are a few considerations: Can the lease abstractor abstract and

approve all leases or is a review and approval process embedded? Can the

lease abstractor enter and approve lease invoices or is there a segregation

of duties? Who is allowed to enter interest rates? Who is allowed to create

new user access?



3. Integration with ERP (General Ledger & Accounts

Payable)

The Lease Accounting application is a new subledger in the ERP

landscape. Where Capital Leases were managed in the Fixed Assets

subledger, Capital Leases are now tracked and managed in the Lease

Accounting software solution along with all Operating Leases to create a

single source of truth.

Additionally, the Lease Accounting application serves as the source where

all lease invoices originate while payments of these invoices are triggered

in the ERP payables module. To that extent, integration is required

between the Lease Accounting application and ERP, specifically between

the Lease Accounting application and General Ledger and or Accounts

Payable with optional integration with Purchasing.

Horizon Project Consulting Corp. will work with the vendor and internal IT

team to integrate the systems by creating high-level and detailed ASC

842-compliant design documents to facilitate the integration between the

systems. Horizon will work with the appropriate teams to create functional

and technical design documents to facilitate integration between ERP and

the Lease Accounting application. Examples of such integration include:




Payable)

A. Contract Management System

B. General Ledger

9

A. Contract Management System

• Identify all lease contracts and ensure that all lease

contracts including Master Service Lease Agreements,

Lease Amendments are identified and passed to the Lease

Accounting application and team for processing.

Horizonprojectsconsulting.net



Payable)

B. General Ledger

• Integrate all new or modified appropriate Chart of Account

segment values to the Lease Accounting application.

• Integrate lease balances from the Lease Accounting

application into the General Ledger:

• Right of Use (ROU): Asset Operating Lease

• ROU: Accumulated Amortization-Operating

• ROU: Asset Financing Lease

• ROU: Accumulated Amortization-Financing

• ROU: Initial Direct Costs

• Tenant Improvement or Landlord Allowance

• ROU: Asset Impairment Cost

• Lease Liability Short-Term Operating

• Lease Liability Long-Term Operating

• Lease Liability Short-Term Financing

• Lease Liability Long-Term Financing




Payable)

B. General Ledger

• Payables

• Integrate

• Lease vendors from ERP Payables to the Lease

Accounting/ASC 842 software solution

• Fixed or Variable invoice payment requests from the

Lease Accounting/ASC 842 software solution to ERP

Payables

• Purchasing

• Integrate lease Purchase Order information from ERP

Purchasing to the Lease Accounting/ASC 842 software

solution


Horizon Projects Consulting Corp. will work with all appropriate

teams to create test scenarios and scripts for these integrations to

ensure seamless processes are developed and deployed



Implementation of the new Lease Accounting standard/ASC 842 is not

an isolated implementation. Adopting the new lease accounting

guideline potentially could mean the creation of a new department

responsible specifically for handling lease payments and their vast

implications. ASC 842 adoption will require assessing and/or revising

processes for the following departments:

A. Legal

B. Technical Accounting

C. Accounting

D. Procure to Pay

E. Real Estate or Equipment Operations

F. I.T. Operations

G. Lease Accounting/ASC 842




A. Legal

The source/origination of all real estate, equipment and embedded

leases. Creating policy/procedures to ensure that all contracts are

evaluated for not only real estate and equipment leases but

embedded leases as well.

B. Technical Accounting

• Creating policy/procedures/guidelines to identify embedded

leases and provide guidance to operational areas on lease

guidelines regarding the interpretation of:

• Reasonable certainness.

• Classification of Operating Leases versus Financing Leases.

• The identification of embedded leases within certain

contracts.




C. Accounting

• Creating policy/procedures regarding the accounting

classification of lease balances.

• Incorporating journals from Lease Accounting/ASC 842

software solution in the monthly close.

• Developing accounting policy for the newly adopted lease

standards.

D. Procure to Pay

• Creating policy/procedures regarding how:

• Lease vendors are identified and processed.

• Lease invoices are processed and paid.

• Purchase Orders for lease contracts are created and

processed.




E. Real Estate or Equipment Operations

• Creating policy/procedures regarding how real estate and/or

equipment managers and the Lease Administrator proactively

manage and operationalize:

• Options

• When should managers be notified of upcoming

options? What role should Accounting/Technical

Accounting play in these reviews, given the financial

implications of exercising options?

• CAM/Insurance/Taxes

• How does the Lease Accounting Team engage with

Real Estate to ensure that the correct

CAM/Insurance/Taxes are paid on a monthly basis?

• Quarterly/Yearly true-ups

• How does the Lease Accounting Team engage with

managers to ensure that quarterly/annual true-ups

are not only paid but accounted correctly per the new

lease standard?




F. IT Operations

• Lease Accounting application support

• Creating policy/guidelines to create or maintain user

access.

• Create policy/guidelines to establish/maintain segregation

of duties as access is granted in the Lease

Accounting/ASC 842 solution.

• Integration maintenance

• Managing the daily/weekly/monthly integrations between

the Lease Accounting application and ERP includes the

following:

• Monitoring and resolving any warning or error

messages

• Monitoring the file transfer process for GL journals and

AP invoices




G. Lease Accounting/ASC 842

• Abstraction

• Developing standards to abstract administrative and

financial information from all leases.

• Lease Management

• Developing guidelines to review options that are set to

expire with the appropriate business and/or accounting

and finance personnel.

• Developing guidelines to review leases that are set to

expire with the appropriate business and or accounting

and finance personnel.

• Lease invoice payment

• Developing guidelines to accept, create and submit lease

invoice payments.

• Disclosures

• Developing guidelines to produce monthly/quarterly Balance Sheet

disclosures per the new Lease Accounting standards/ASC 842.




H. Vendor relationships

I. Project Plan

J. Project Meetings

K. Status Reports

• Horizon Projects Consulting Corp. will manage all vendor

relationships in the deployment of the Lease Accounting

software solution. This includes managing all aspects of the

relationship with the following:

• Any Accounting/Advisory Services firm. These entities are

typically engaged to validate “completeness” of the lease

population along with providing Technical Accounting

guidelines in the adoption of the new lease standard

policy/ASC 842.

• The Lease Accounting software. From research to

software evaluation, selection and implementation,

Horizon Projects Consulting Corp. will manage the vendor

process to ensure that the vendor is performing according

to project expectations.





I. Project Plan

J. Project Meetings

K. Status Reports

• Horizon Projects Consulting Corp. will develop and maintain a

comprehensive project plan and communicate timelines and

deliverables for all aspects of the effort, people, process and

technology. We have a proven track record of keeping people

on task in tight deadline situations.





I. Project Plan

J. Project Meetings

K. Status Reports

• We will lead all project meetings to share status, report issues,

risks, and/or project scope changes, which includes providing

timely updates to stakeholders, including Steering Committee

and Project Sponsors.





I. Project Plan

J. Project Meetings

K. Status Reports

• Through weekly or otherwise deemed reporting, Horizon

Projects Consulting Corp. will communicate information

effectively to other team members.


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