Software Concepts for Reporting Lease Accounting Standards Codification 842

by Phil Tirino September 2018
This article discusses reporting concepts and solutions for systems specifically designed to meet the reporting requirements of both the lessor and lessee under ASC 842. While placing considerable focus on lessee reporting, new software has the opportunity to create simplified and powerful reporting and structuring capabilities for the lessor.

This article discusses reporting concepts and solutions for systems specifically designed to meet the reporting requirements of both the lessor and lessee under ASC 842. The new standards require adoption for periods ending after December 15, 2018 for public companies and December 15, 2019 for private companies. While placing considerable focus on lessee reporting, new software has the opportunity to create simplified and powerful reporting and structuring capabilities for the lessor.

Lessor accounting must be at the foundation of reporting software, and lessee-side reporting could simultaneously be generated as an ancillary function. A good question to ask for a lessor might be “Is there a need for the lessor to understand and assist in explaining the impact of a transaction on the lessee’s books or account or is that strictly the purview of the lessee and his accountants?” To answer that question you would have to look at the transactions from the perspective of the lessee.

It is reasonable to assume that newly introduced levels of review may appear solely because of the reporting requirements. The balance sheet review may lead to questions regarding rates and market values that were of less import or more obscured in the past. The impact of this new scrutiny may drive the leasing market to a polarization between clearly operating and clearly financing transactions with very little room in the middle for structuring tactics. Perhaps that was the intent of the pronouncement?

The Marketing Impact

Then, believing transactions will come under closer scrutiny, how much support does the lessor’s representative have to offer in order to help market and close the deal? The lessor has an array of positions between three distinct options regarding helping the lessee on accounting questions:

  1. Give no help, telling the lessee to see his accountant.
  2. Give some help.
  3. Give complete support, schedules and entries

The lessor will land somewhere in the spectrum of support offered to the lessee depending very much on the market he is addressing and his capabilities.

Considering the Options

Option 1: Provide No Help
This would probably result in a delay in the decision process while the lessee seeks approval from his own, perhaps ill-equipped advisors. Lacking the benefit of the lessor’s knowledge of the deal, mistaken conclusions can easily develop resulting in the loss of the transaction. This “hands off” approach, though clean, can very easily prove to be expensive. Prudence would suggest that a complete hands-off approach might not prove advisable, especially in cases of smaller non-public companies with limited personnel to dedicate to the issue.

Options 2: Provide Some Help
Giving some help is an instinctive response, but it may leave the lessee with unanswered questions and the lessor in a position of weakness vis-à-vis those that are better equipped for presenting the transaction in a positive light. Though better than Option 1, it may prove to be too little, too late in many cases. Certainly if the competition leaves the lessee feeling knowledgeable, empowered, and comfortable, this approach will likely fail. How do you make the lessee feel empowered is the question and is it your job?

Option 3: Provide Reports, Schedules and Journal Entries
Providing full-blown accounting and booking information may alleviate the extent of delay on the part of the lessee’s review process should such a process exist, but it could be a double-edged sword and result in more problems than it cures. Extensive support would require being able to respond rapidly to the various situations encountered, requiring a powerful software system and trained personnel, resources that are often hard to find and expensive to maintain.

Lessor Accounting Features Needed

If a company decides it has little or no need for knowledge of the new rules then lessor accounting remains the primary focus. The lessor system should perform the following accounting functions by lease type :

YIELD ANALYSIS TYPICALLY REQUIRED

LESSOR LESSEE
1) Finance Lease Reporting Y Y
2) Sales-type Lease Reporting Y Y
3) Operating Lease Reporting N Y

 

Please note that the lessee is required to discount his lease for reporting on the balance sheet, even where the lessor does not use discounting.

The system should also allow the deferral and amortization of income and/or expense items over the lease term allowing for structuring leeway.

Versatility in structuring transactions, doing yield analysis on the newly structured leases, and then seamlessly carrying the transaction over to the accounting function leaving an easily followed trail and history are basic to rapid response. Creating a transaction folder or template for other similar transactions should take as little as 15 minutes from start to finish on any given transaction. Once created the template can be repeatedly used with or without custom mortification from deal to deal. The transaction capability should be as complex or as simple as the designer requires. Optimally, the yield analysis and structuring package should be capable of doing any cash flow analysis including the newly eliminated leveraged lease legacy reporting using two separate sinking fund methods with accuracy capabilities into the trillions of dollars. After the initial set up, the structuring features should be bypassed for all accounting and maintenance functions.

Lessee Accounting Features Needed

DIY Production

Lessees face two choices for maintaining their leased equipment portfolio: do-it yourself or outsource. If you have personnel with the knowledge and time then, given the necessary software and training, in-house can prove the most cost effective approach. It may however, be available only to larger organizations. A system should be affordable and useable for the sole purpose of tracking lessee side reporting. Maintaining a portfolio of transactions being amortized using discounted cash flow techniques can be tedious and expensive. The lessee would want a system that is easily maintained for new additions, terminations and modifications. The likelihood is that considerable leeway may be necessary in terms of accuracy, initially at least, to get off the ground due to learning time and workload. The system needs to be designed from the bottom up to permit rapid familiarization with its database and procedures rapidly addressing the lessee’s unique needs. It should enable the uninitiated to create and maintain transactions by providing a soup-to-nuts guidance from set-up to periodic reporting to expiration or early termination. It should produce step-by-step balanced journal entries throughout the entire life of the transaction(s), either singularly or as a group (portfolio) for any selected period or group of periods. It should produce similar reports and journal entries for the lessor side reporting.

Outsourced Services

Believing the market is the best judge of how to do things efficiently, the lessor will be looking squarely into the mirror when he says, “Hey, the best and most qualified person to handle lessee reporting may be me, the lessor.” We have alluded to this supposition when discussing marketing impact. In the accounting trenches, there is a good reason why the lessor is the best guy to turn to for help: “he has the beef,” so to speak. He has the know-how, the systems and the motivation. “A central key point is that the system should be designed to simultaneously report lessor and lessee accounting each period including booking entries for each side on a reciprocal reporting basis without any additional effort.” If reciprocal reporting proves undesirable for any reason, then a separate modified transaction can be booked in a presentation file for use with the lessee. Though additional work, a presentation model still avoids 90% of the repetitive input and deal familiarization time. Presenting the lessee with periodic summary journal entries eliminated the need for lessee accounting know-how. Once set up, the lessee need not contact the lessor again until the lease ends or early termination entries are needed. These entries should be available quickly and easily, assuming a knowledgeable operator familiar with the system. Rapid response is key to the marketing edge.

Other Approaches

Considering the primary objective of ASC 842 is placing an asset and liability on the lessee balance sheet, then a simple accumulation of future lease cash flows in a spreadsheet, discounted to the reporting date, will suffice. Leaving the operating statement alone , no lease type distinction need be made. The issue here becomes one of timing differences, the same risk that plagued the leveraged lease method of accounting as adopted. If a system is designed to handle portfolio analysis for both lessor and lessee, then, though not the most desirable approach, it would provide a shortcut method to accommodate these hybrid situations.

A versatile system should produce control accounts for general ledger booking, accounts receivable booking and accounts payable booking and be designed to dovetail with existing in-house subsidiary ledger systems and the general ledger system.

Summary

New and innovative accounting systems need to place considerable emphasis on lessee side reporting. We have tried to demonstrate some of the opportunities that can be garnered from innovative systems while fulfilling accounting requirements from a lessor administrative and marketing standpoint. Larger systems will by necessity be more limited in capability, while systems designed for smaller applications will likely be more versatile, innovative and responsive. Systems designed for lessee installation must be affordable. “There is no such thing as a bad situation … just new opportunities.” The first to recognize and latch onto these opportunities may garner a win.

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