With less than a month before the lease accounting rules take effect, companies are working through the last stage of implementation. A recent PwC poll showed that only four percent of public companies had completed the implementation process and around 80 percent of public companies are still working on it.
However, PwC partner Sheri Wyatt said during an interview with Bloomberg Tax, that the polling results are not surprising and that companies are taking the last quarter of their fiscal year to test their lease systems and dry run their lease accounting solutions. The fact that “80 percent are close to complete is a good sign, indicating that most of the companies will be [in] compliance by the end of the year,” she added.
What to Focus on During the Final Stage
According to Wyatt, companies should focus on their system testing during the final stage of implementation. As part of their user acceptance testing, companies need to build use cases for their lease population by “defining what different lease scenarios are, running them through the system, and comparing the output from the system with the result they expected,” she said. That way, the companies will be able to identify the differences between their expectations and the system output, and figure out what needs to be modified before the effective date.
Wyatt also believes that companies should focus on the migration of data from their old system to the new. She stated that “from a data perspective, making sure that you are getting the full data migration is important.” Through the data migration process, companies may find there is a need for new data, and that there are differences between how a company’s old system stored data and how their new system wants the data to be organized before it can be accepted.
Finally, Wyatt warns that companies shouldn’t underestimate the time it will take to get the data into the new system and to test it.
With respect to accounting, finishing implementation of ASC 842 should not be the only thing companies are focused on. Wyatt said that coming into 2019, companies should also consider the maintenance of their accounting policy and process controls. There are situations that can trigger changes to the accounting after a lease commences--changes including remeasurements and modifications.
A change in a lease term might require a remeasurement of the lease asset and liability. A lease can be modified based on the needs of the lessee as well as market conditions. Wyatt said that companies need to establish accounting policies to identify those triggering events that could require a remeasurement. For many companies, having a lease accounting solution added to their enterprise resource planning (ERP) system is probably new, and she believes that they also need to make sure that their implemented system solution can handle a remeasurement.
As part of the implementation, Wyatt also said that PwC is advising their clients to incorporate their accounting policy into their education process, so that everyone is aware when a business decision may lead to an accounting change. According to her, “A lot of companies today are really focusing on getting into compliance with the new standard, but once you get [into] compliance, being able to maintain the compliance through a strong accounting policy and a good education process is critical.”
Opportunity for Process Improvement
Implementing changes and new processes is also an opportunity for improvement in other areas. Wyatt said that while many companies are focused on implementing the new accounting standards by the effective dates, they should treat this as an opportunity to improve their finance processes. Once companies go beyond compliance and focus on planning for operational effectiveness, improvements such as moving from a manual process to a more automated process can be made.
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