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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.
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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
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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.
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Step-by-Step Abstraction Process Checks and Balances
2. Lease Abstraction Standards Validation Process
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.
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Step-by-Step Abstraction Process Checks and Balances
2. Lease Abstraction Standards Validation Process
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?
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Step-by-Step Abstraction Process Checks and Balances
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:
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Step-by-Step Abstraction Process Checks and Balances
3. Integration with ERP (General Ledger & Accounts
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
Step-by-Step Abstraction Process Checks and Balances
3. Integration with ERP (General Ledger & Accounts
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
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Step-by-Step Abstraction Process Checks and Balances
3. Integration with ERP (General Ledger & Accounts
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
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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
Step-by-Step Abstraction Process Checks and Balances
4. Impacts of Process Design
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
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Step-by-Step Abstraction Process Checks and Balances
4. Impacts of Process Design
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.
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Step-by-Step Abstraction Process Checks and Balances
4. Impacts of Process Design
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.
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Step-by-Step Abstraction Process Checks and Balances
4. Impacts of Process Design
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?
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Step-by-Step Abstraction Process Checks and Balances
4. Impacts of Process Design
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
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Step-by-Step Abstraction Process Checks and Balances
4. Impacts of Process Design
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.
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Step-by-Step Abstraction Process Checks and Balances
5. Project Management
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.
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Step-by-Step Abstraction Process Checks and Balances
5. Project Management
H. Vendor relationships
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.
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Step-by-Step Abstraction Process Checks and Balances
5. Project Management
H. Vendor relationships
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.
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Step-by-Step Abstraction Process Checks and Balances
5. Project Management
H. Vendor relationships
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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