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ASC 842 Lease Accounting What You Need to Know in 2023 and Beyond

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.<br>

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ASC 842 Lease Accounting What You Need to Know in 2023 and Beyond

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  1. ASC 842 Lease Accounting: What You Need to Know in 2023 and Beyond 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

  2. 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 have leases will need to create lease abstracts from multiple, maybe hundreds of documents, so that key elements can be amended for future documents and more importantly such that financials are abstracted for inclusion in relevant financial statements. This is a lengthy and detailed 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. These 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 standard requires 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

  3. which the changes occur. This item is simply a clarification of the language and intent of the requirement. Step-by-Step Abstraction Process Checks and Balances ● 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 team to establish standards on information to be abstracted from all lease contracts to satisfy ASC 842 requirements and your lease accounting policy. Horizon Projects Consulting Corp. will work with your Lease team to identify standards by which lease contracts should be established. ● 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 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 standards by which all contracts for operating and finance leases will be

  4. 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. Beyond lease abstraction, Horizon Projects Consulting Corp. will work with the Lease team to create test conditions to validate that the application is calculating balances according to FASB 842 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 installed? ● 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? ● Integration with ERP (General Ledger & Accounts Payable) The Lease Accounting application (LAP) 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 application software solution along with all Operating Leases to create a single source of truth.

  5. Additionally, the LAP 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 application and ERP, specifically between the LAP 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 LAP Examples of such integration include: 1. Contract Management System 1. Identify all lease contracts and ensure that all these contracts including Master Service Lease Agreements, Lease Amendments are identified and passed to the Lease Accounting application and team for processing. 2. General Ledger 1. Integrate all new or modified appropriate Chart of Account segment values to the LAP. 2. Integrate lease balances from the LAP 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

  6. ■ Lease Liability Short-Term Financing ■ Lease Liability Long-Term Financing ● Payables 1. Integrate 1. Lease vendors from ERP Payables to the Lease Accounting/ASC 842 software solution 2. Fixed or Variable invoice payment requests from the Lease Accounting/ASC 842 software solution to ERP Payables 2. Purchasing 1. Integrate lease Purchase Order information from ERP Purchasing to the Lease Accounting/ASC 842 software solution 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. ● Impacts of Process Design Implementation of the new lease standard/ASC 842 is not an isolated implementation. Adopting the new guideline potentially could mean the creation of a new department responsible for lease managing the lease portfolio and all lease financial reporting matters. ASC 842 adoption will require assessing and/or revising processes for the following departments: 1. Legal 1. The source/origination of all leases. Creating policy/procedures to ensure that all contracts are evaluated for not only real estate and equipment leases but embedded leases as well.

  7. 2. Technical Accounting 1. Creating policy/procedures/guidelines to identify embedded leases and provide guidance to operational areas on lease guidelines regarding the interpretation of: 1. Reasonable certainness. 2. Classification of Operating Leases versus Financing Leases. 3. The identification of embedded leases within certain contracts. 2. Accounting 1. Creating policy/procedures regarding the accounting classification of lease balances. 2. Incorporating journals from Lease Accounting/ASC 842 software solution in the monthly close. ● Developing accounting policy for the newly adopted lease standards. 1. Modifying financial reports to include new lease accounts to satisfy financial statements requirements 2. Procure to Pay 1. Creating policy/procedures regarding how: 1. Lease vendors are identified and processed. 2. Lease invoices are processed and paid. 3. Purchase Orders for lease contracts are created and processed. 2. Real Estate or Equipment Operations 1. Creating policy/procedures regarding how real estate and/or equipment managers and the Lease Administrator proactively manage and operationalize: 1. Options 1. When should managers be notified of upcoming options? What role should

  8. Accounting/Technical Accounting play in these reviews, given the financial implications of exercising options? 2. CAM/Insurance/Taxes 1. How does the Lease team engage with Real Estate to ensure that the correct CAM/Insurance/Taxes are paid on a monthly basis? 3. Quarterly/Yearly true-ups 1. How does the Lease team engage with managers to ensure that quarterly/annual true-ups are not only paid but accounted correctly per the new lease standard? 4. T. Operations 1. Lease Accounting application support 1. Creating policy/guidelines to create or maintain user access. 2. Create policy/guidelines to establish/maintain segregation of duties as access is granted in the Lease Accounting/ASC 842 solution. 2. Integration maintenance 1. Managing the daily/weekly/monthly integrations between the Lease Accounting application and ERP includes the following: 1. Monitoring and resolving any warning or error messages

  9. 2. Monitoring the file transfer process for GL journals and AP invoices 2. Lease Accounting/ASC 842 1. Abstraction 1. Developing standards to abstract administrative and financial information from all leases. 2. Lease Management 1. Developing guidelines to review options that are set to expire with the appropriate business and/or accounting and finance personnel. 2. Developing guidelines to review leases that are set to expire with the appropriate business and or accounting and finance personnel. ● Lease invoice payment 1. Developing guidelines to accept, create and submit lease invoice payments. 1. Disclosures 1. Developing guidelines to produce monthly/quarterly Balance Sheet disclosures per the new lease standards/ASC 842. ● Project Management

  10. 1. Vendor relationships 1. Horizon Projects Consulting Corp. will manage all vendor relationships in the deployment of the lease application software solution. This includes managing all aspects of the relationship with the following: 1. 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. 2. The lease application 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. 2. Project Plan 1. 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. 3. Project Meetings 1. 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. 4. Status Reports

  11. 1. Through weekly or otherwise deemed reporting, Horizon Projects Consulting Corp. will communicate information effectively to other team members. Contact Us: Name : Horizon Projects Consulting Address : 119 Gold Rush Ct, Clayton, CA, 94517 Email : info@horizonprojects.com Phone : 800-937-0142 Website : https://horizonprojects.com/

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