You have gone to some CPE and read up on how ASC 842 impacts your organization, now it’s time to adopt. You may be thinking that managing your lease portfolio in Excel should be an easy exercise. Create a workbook, build a worksheet that stores the pertinent lease details, create an appropriate amortization schedule. Copy the worksheet for each lease that you have, and you are all done.
While that seems like a reasonable plan let’s think through some details.
“the best-laid plans of mice and men often go awry” – Robert Burns
For each lease that is covered under 842 you’ll need to create an amortization schedule based on the classification of the lease (finance or operating). That classification is determined by a number of factors of the lease and that classification could change if the terms of the lease change over time. You’ll also need to account for non-lease components (common area maintenance, plate fees, etc.), escalating payments and any other associated payments made on the lease including down payments, initial indirect costs, tenant allowances, purchase option payments and so forth. Taking that all into account, you now have a rather complicated Excel worksheet that covers a single lease.
Since the goal of ASC 842 is transparency, upon adoption, leases now need to be included on the balance sheet and reoccurring journal entries will be required. Your Excel worksheet needs to include a way to calculate these journal entries on a monthly, or at minimum, quarterly basis. While you are creating the reoccurring entries, don’t forget to include new leases, calculating the initial long- and short-term liability as well as the ROU asset value for each lease.
Additional activity entries will need to be recorded on the income statement. Lease expense will be straight lined over the life of the lease for operating leases. Finance leases will include amortization and interest expense. No longer will your AP invoice simply hit a rent or lease expense account, this activity will be derived from the Excel schedule. Reconciling with the AP invoices will be another step in the process.
With all of that, you have the Excel worksheet for one of your leases doing everything you need. You are happy with the details it stores, the amortization schedule it creates, and the journal entry it produces for you. You have validated the results based on the standard and you have hopefully built the worksheet in a way that prevents you from unintentionally modifying data that would change the schedule in any way unknowingly.
Now, sometime in the future you renegotiate the terms of a lease by extending the life by 2 years. That renegotiation causes a review of the discount rate and a requires a substantial change to the amortization schedule. This change only impacts the future periods. Additional changes to a lease could include an early termination, expansion of space, payment changes due to CPI, etc. Each scenario requiring a slightly different approach to modifying the future activity of the lease. Your Excel worksheet will need to know how to deal with these changes and, for completeness it should keep a history of the lease before and after the change.
After you think through all of the above don’t forget, ASC 842 includes additional disclosures that need to be included on your annual financial reports. From the Excel workbook, data will need compiled and calculated to arrive at the right of use assets obtained in exchange for new lease liabilities, the weighted-average remaining lease term for operating and finance leases along with a list of other new reporting items. Granted, these typically only need to be done annually but they need to factor in any lease adjustments, new and terminated leases.
Thinking through all of the above, how much time (and money) have you now spent on your Excel workbook? How accurate is it? What happens if it gets accidentally deleted or a macro gets changed without you realizing it? As you add leases to your portfolio does that workbook become unmanageable? Do your auditors agree with your calculations? Lots of questions that you should not have to be bothered with. At some point it may make more sense for you to investigate a system that will manage lease accounting under ASC 842 for you. The comparison should be how much does a properly vetted lease accounting system save me in terms of time, money and stress, not what does a lease accounting package cost as compared to Excel.
If your lease profile is greater than 10 individual leases, management is better served by a lease software solution, such as simpLEASE. In addition to offering our clients simpLEASE, Schneider Downs provides advisory services for the technical aspects of lease accounting. For more information concerning lease accounting and the impact on your organization, please visit the Schneider Downs Our Thoughts On blog or email us at [email protected].
