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1 Copyright ©2021 Tango. All rights reserved. FASB ASC 842 & IFRS 16 COMPLIANCE | LEASE PROCESS Introduction The path by which leases travel are processes – negotiation, execution, payment, renewal, amendment, adjustments, and on and on. FASB ASC 842 and IFRS 16 will cause all organizations to lay a new path for leases. This new path, or set of lease processes, will travel into new departments, potentially to third-party providers outside the four walls and back. The key here is to chart the path ahead of time, so you won't get lost or hit a lease accounting dead end. While the number of process changes are too numerous to document here, we've focused on a few high impact ones that are important to understand. Lease Identification & Classification Process The definition of a lease has changed with the new regulations and one of the biggest challenges facing companies is the assessment of all contracts to determine if they should be classified as leases under the new rules. For most organizations, real estate leases are more material, likely to be centrally managed in a software system and are fewer in number. Equipment leases are greater in number, typically lack a centralized database and are often executed and managed at the subsidiary, department, local office, or plant level. 'Embedded' leases, which exist if there is an explicit or implicit asset in the contract and the customer controls use of the asset, are even more difficult to identify as they are often buried in agreements and determining their classification requires deeper interpretation expertise. To meet the new requirements today and in the future, companies will need to establish centralized enterprise-wide processes to assess contracts after they are executed and classify lease or non-lease contracts, as well as type of lease. Procurement Processes Mid-size companies often lack a procurement group and rely on decentralized or department level procurement of products and services. All of this should change as companies begin to comply with the new lease accounting standard. A standardized procurement process is the perfect place to utilize new lease identification and classification tests to ensure leases are not slipping through the cracks. It also presents an opportunity to deploy deeper lease vs. buy analysis and other lease optimization tactics. Accounts Payable & Accounts Receivable Processes While real estate leases tend to be managed centrally by a lease administration group and a purpose-built lease software system and database, the same cannot be said for equipment and embedded leases. The call to action of the new lease accounting standard is clear – all leases should be managed in a centralized, purpose-built software solution. Moving to a single system to manage all leases will impact both the accounts payable and accounts receivable functions for all lessees. Specifically, equipment leases – and to a degree, embedded leases – will move to a process like that of real estate leases, where the software calculates payment obligations and communicates fixed and variable payments for a particular period to a company's financial system for payment (i.e. accounts payable) via integration. Today, equipment leases are not typically managed in a system and accounts payable simply pays monthly invoices as received. Moving forward, the lease administration and accounting system will take over ownership of payment calculation and approval, while accounts payable will merely cut checks.

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