Both FASB and IASB released their own versions of leasing standards making Lease Accounting the latest buzzword in the industry today. If you are an organization with a substantial lease portfolio, the odds are that you have already initiated measures to comply with these guidelines that will become applicable as early as 2019.
As a matter of fact, both FASB and IASB initially started out with the idea of coming up with a single lease accounting rule in early 2010 but agreed to disagree (in early 2014) in certain areas and as a result, dropped the idea of a uniform standard.
This has made the reporting process all the more challenging for organizations that are bound by the reporting requirements of both U.S GAAP and IFRS, in particular. While it’s true that there are quite a few common points in both standards, the areas in which they differ pose certain complications for such entities since there is some uncertainty as to whether they have to maintain two separate books of accounts to fulfil the requirements under each standard. To clear this air of ambiguity, we will explore both the commonalities and differences in the reporting requirements under GAAP and IFRS and discuss how IBM TRIRIGA can help achieve compliance under both these guidelines.
What is common
- Definition of a lease
- Recognition of lease assets and lease liabilities in the balance sheet, initially measured in the same way
- Carry forward of previous lessor accounting requirements
What is not common
Some of the major differences between the GAAP and IFRS model include the following:
- Accounting Model – While FASB has proposed to continue with the dual accounting model wherein the lease classification test is based on current U.S. GAAP classification criteria, IASB has completely removed such lease clarification tests and now requires all leases reported on the balance sheet to be treated as Finance leases.
- Measurement of lease assets – Under the FASB model, these former off-balance sheet leases will end up with a slower rate of depreciation as against the IASB model, which requires the leases to be depreciated on a straight line basis. Consequently, the carrying amount of lease assets as well as the reported equity under the FASB model will be higher than what will result under the IFRS 16 methodology.
- Presentation of Lease Liabilities –The organization is expected to present lease liabilities relating to former on and off balance sheet leases as separate line items under the FASB model while there is no such compulsion under IFRS 16, as IASB expects the organization to make such distinction only if it considers it to be relevant in regards to gaining a better understanding of its financial position.
How can IBM TRIRIGA help
IBM TRIRIGA, being the leader in the IWMS space in the industry today, has come out with its latest version, IBM TRIRIGA Real Estate Manager 10.5.3, which will enable you to accelerate compliance with both the FASB and IASB leasing standards. Some of the newly added features in the TRIRIGA Real Estate Manager for complying with these leasing standards are listed here:
- Segregation of duties: With the 10.5.3 release it comes with 2 mandatory roles OOTB: Lease Accountant, and Lease Administrator. The Lease Administrator role can only create leases and assign payments. Upon completion of these functions, the Lease Administrator will submit the lease for review by the Lease Accountant. The Lease Administrator has read-only access to the Accounting tab. The Lease Accountant only has editable access to a lease’s Accounting tab to make updates to the financial data prior to Activating the lease. The Lease Accountant has read only access to the other tabs (General, Contacts, Location, and Payments.) This access allows the Lease Accountant to perform reviews and analysis on a lease.
After the lease has been activated by the Lease Accountant, the Lease Administrator can perform amendments and renewals, and terminate the lease. However, these modifications to the lease will require submission to the Lease Accountant for their review and the possible remeasurement and reclassification of the lease. Any changes made by the Lease Administrator will require review and approval by the Lease Accountant. The Lease Accountant can also make modifications to the lease if the “reasonable certainty” of an option changes, or there is a change in the Fair Market Value, Incremental Borrowing Rate, or the Residual Value Guarantee. More detail regarding these modification processes are presented later in this guide.
- Lease classification set as Finance and Operating (instead of Type A and Type B that appeared in the earlier versions) based on the lease treatment calculation. Additionally, for GAAP, the question “No alternative use of specialized asset to lessor at end of lease term” has been added under the FASB Treatment section to determine the lease classification.
TRIRIGA also allows the user to override the lease classification from Finance to Operating if an override comment is provided in the Management Assumptions field. The Override Lease Classification option is shown only if the lease classification is Finance.
- IBM TRIRIGA supports the Re-measurement logic under IFRS by letting the user choose the asset measurement methodology from three options (At amortized cost, FV under IAS 16 and FV under IAS 40), which are provided in a drop-down menu format for the question “Under IFRS, how will company re-measure the asset?”
When “FV under IAS 40” is selected for instance, TRIRIGA allows you to update the Fair Value of the lease asset minus the amortization benefits of such enhancements in fair market value. However, the finance schedule for the calculation of this option is not supported by TRIRIGA and it needs to be done by exporting it to Microsoft Excel.
- IBM TRIRIGA 10.5.3 allows organizations to adopt the new standards either individually on a lease to lease basis or for multiple leases all at once using the Review Lease Assumptions process from the Lease Portal. This function allows the user to regenerate the Operating or Finance schedules from the Look Back Fiscal Period that is to be defined in the Application Settings. The default settings for the Look Back Fiscal Period has been set as two years of history using the new standard, as per the FASB/IASB guidelines.
- Lease Modifications – TRIRIGA 10.5.3 introduces a revised process for recording lease modifications which includes a Modification Effective Date that allows the fiscal period in which the changes should be reflected to be determined by the Lease Administrator or Lease Accountant. There are 4 modification types in 10.5.3: Data Revise, Change in Assessment, Amendment, and Change in Contractual Factors. Due to the new separation of role duties in 10.5.3 only the Lease Accountant will be able to perform a Change in Assessment, and a Change in Contractual Factors; while only the Lease Administrator is able to perform an Amendment. Both roles are allowed to perform a data revision.
See Screenshots Below:
- If an organization has a multinational lease portfolio, IBM TRIRIGA can help report local accounting standards. This can be done by either setting up local reporting during the creation of a new lease or adding local reporting to existing lease records.
- Journal Entries: Standard OOTB Journal Entries cover the basic entries needed for the Lease Accounting Life Cycle such as:
- Lease Activation
- Monthly Straight-lining
- Amortization postings
- Principal reduction
Customized Journal entries may be created using the Journal Entry Setup process. Once all Journal Entries have been created, the Journal Entry Processing procedure should be followed in each period. The result of this procedure will be the creation of a Data Transfer Object (DTO) file that will load into your ERP General Ledger. After all Journal Entries have been processed, the lease accounting period should be closed.
With its comprehensive range of features and capabilities, there is no doubt whatsoever that IBM TRIRIGA 10.5.3 can help you in achieving full compliance with both the FASB (GAAP) and the IASB (IFRS 16) guidelines. If you have any further questions relating to FASB/IASB, reach out to the IBM TRIRIGA experts at ValuD at firstname.lastname@example.org.