Lease accounting: when Excel is no longer a safe tool

Before the transition to FAS 25/2018 and IFRS 16, operating leases lived in expenses: the monthly payment was a line item in the income statement. Accounting came down to a payment schedule, and the table coped with this.

Now the lessee recognizes on the balance sheet right to use an asset And lease obligation. The liability is the discounted amount of future payments; the asset is depreciated, the liability is compounded with interest. A discount rate, a lease term taking into account the intention to renew, variable payments and recalculation whenever conditions change have appeared. Accounting has turned from a graph into a model, and this is where the table ceases to be a safe tool.

The point is not that the table does not count - it does. The point is what it doesn't have.

• Recalculation during modification. Changes in term, rate or payments require retrospective recalculation. In the table, this is a manual operation; with hundreds of contracts, it is guaranteed to be carried out with errors.
• History of judgments. Why was this deadline, this rate, this assumption chosen? The auditor asks about this every year, and the answer should be kept next to the calculation, and not in correspondence.
• Audit trail. Who changed the cell and when is not saved in the file. Any number ultimately has no author.
• Versioning. Recalculation of the previous period after closing requires a saved “as was” version. Fifteen files with suffixes _final_v3 this problem is not solved.
• Scale. Hundreds of lease agreements for premises, transport and equipment, some with foreign currency payments and indexation. Recalculating the closure turns into a multi-day operation with the risk of not being able to make it in time.
• Communication with accounting. Postings are transferred manually; discrepancies between calculations and registers are detected during reconciliation, and not at the time of occurrence.
• Dependence on the person. One employee understands the model. His vacation is a risk of closing the period.

If the contracts did not change, the table would be enough. But they change constantly, and each change requires its own accounting scenario.

• Extension or reduction of term — recalculation of the liability at a revised rate with an adjustment to the value of the asset.
• Indexation of payments — recalculation of the obligation; the reflection depends on what caused the change.
• Change in area or composition of the leased item - may qualify as a separate new agreement or as a modification of an existing one; the consequences are different.
• Early termination — write-off of assets and liabilities with recognition of the result.
• Changing Option Intent - not a change in the contract at all, but a revision of the judgment; nevertheless leads to a recount.

The key requirement for the system is store not only the current state, but also the entire chain of contract versions with dates and reasons. Without this, it is impossible to reproduce the previous calculation, and this is exactly what the auditor asks.

• Stage 1. Inventory of contracts. The most underrated and most time-consuming: contracts are located in different departments, part of the lease is hidden inside service contracts. The goal is to find everything that is essentially a lease, regardless of the title of the document.
• Stage 2. Accounting policy. Low value threshold, approach to determining the rate, classification by asset groups, applied simplifications. Decisions are recorded in writing and applied consistently - this is the first thing the auditor will check.
• Stage 3. Calculation model. Setting up algorithms for policies, reconciling a sample of contracts with manual calculations. Discrepancies at this step are normal; they are the content of the work.
• Stage 4. Integration with the accounting system. Automatic postings, register reconciliation, period closing without manual transfer.
• Stage 5. Parallel period. One or two closures are counted both in the system and in the old way. Expensive, but this is the only way to make sure that the transition does not break the reporting.
• Stage 6. Transfer into operation. Regulations for the implementation of new contracts and modifications, training, responsible persons. Without this, the system becomes obsolete within a quarter.

• A complete register of contracts has been collected, including leases hidden inside service contracts.
• The accounting policy for leases has been approved and contains an approach to the rate, terms and simplifications.
• For each contract, the term including options and the rationale for this judgment are fixed.
• The methodology for determining the discount rate is described and applied uniformly.
• Variable payments are divided by type: included in a liability and recognized as an expense.
• Calculations according to FAS 25/2018 and IFRS 16 are carried out in parallel, the differences are understandable.
• All modification scenarios are processed by the system, not manually.
• The version history is saved: the previous calculation can be reproduced.
• Postings are generated automatically and checked against registers.
• Disclosures for reporting are collected from the system and are not calculated separately.
• There are regulations for introducing new contracts and responsible persons have been appointed.
• Closing a period does not depend on one employee.