simpLEASE Accounting

LEASE ACCOUNTING FREQUENTLY ASKED QUESTIONS
 

Why was simpLEASE created?

On February 25, 2016, the Financial Accounting Standards Board (FASB) finalized the standards update related to accounting for leases, ASU 2016-02. The primary goal of ASU 2016-02 is to improve transparency surrounding financial reporting and leased assets. As with most changes to rules like these, there are a number of details that need attention or else issues could arise. Each company is different. Every lease is unique. It became apparent that there was a need for a resource that could simplify the process of identifying how each lease should be classified under the new guidance. Similarly, it also became apparent that this tool should be built on the knowledge of accountants. By integrating the insights of Schneider Downs’ accounting experts with the programming experience of its Technology Advisors team, simpLEASE delivers an easy-to-use software tool to address the challenges presented by the new lease accounting standard.

How does simpLEASE work?

simpLEASE is a web-based application that uses a series of easy-to-navigate wizards to assist in classifying leases and analyze how they should be accounted for under the new standard. The program provides intuitive prompts to guide the user through the process, whether reviewing 10 leases or 100. The program is built upon SD inSITE, a web-based application developed by Schneider Downs that’s compatible with most any accounting system.

Do all leases go on the balance sheet under the new lease accounting standard?

With the implementation of the new lease accounting standards, substantially all leases will now go on the balance sheet. This includes both operating and finance (previously referred to as capital) leases. There are, however, certain leases that will be scoped out or may be exempt. Some of these exclusions are leases for inventory, assets under construction, intangible assets or biological assets. There is also an accounting policy election to exclude those leases that have a term of fewer than 12 months and no purchase options, or a renewal period that is reasonably certain to be exercised.

Does the new lease accounting standard require me to change how I account for existing leases?

Yes, the new lease accounting standards will significantly change how existing leases are accounted for today. There is no grandfathering of previous leases. Upon implementation of the new standards, all leasing arrangements will have to be accounted for under the new guidance.

Under the new guidance, what is an operating lease?

Under the new lease accounting guidance, from the perspective of a lessee, an operating lease will be anyone that does not meet the definition of a finance lease (see definition of finance lease below).

Under the new guidance, what is a finance lease?

Under the new lease accounting guidance, from the perspective of a lessee, a finance lease (previously referred to as a capital lease) is one that meets one or more of the criteria below:

• The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
• The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
• The lease term is for the major part of the remaining economic life of the underlying asset.
• The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.
• The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

When does my company need to implement the new lease accounting guidance? 

Public business entities are required to adopt ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e. calendar year 2019), and non-public business entities the following year (i.e. calendar year 2020).  However, the amendments are required to be presented retrospectively to all periods presented in a company’s financial statements, so a company presenting two years of financial information will need to implement the new rules under ASU 2016-02 the year prior to the effective date.

I am a small business owner (privately held company) that leases office equipment. Do I need to be concerned with changes in lease accounting?

Yes, the scope of ASU 2016-02 does not provide an accounting alternative for privately held companies.

I generally only lease equipment for less than 12 months. Does the new lease accounting guidance impact me in any way?

A lessee is permitted to adopt an accounting policy by asset class to not recognize lease assets and lease liabilities for leases with terms of 12 months or less, including any renewal periods that are reasonably certain to be exercised.  Leases with initial terms of less than 12 months and have renewal periods that are reasonably certain to be exercised, are required to be accounted for under ASU 2016-02.

My company leases land for the exploration of natural resources (e.g. oil and natural gas). Are we impacted by the new lease accounting standard?

Certain leases are excluded from the scope of ASU 2016-02, including those initiated to explore for or use minerals, oil, natural gas and similar non-regenerative resources.  These types of leases will continue to be accounted for under Topic 930 Extractive Activities-Mining and 932 Extractive Activities-Oil and Gas.  Leases of intangible assets, biological assets and assets under construction are also excluded from the scope of ASU 2016-02.

Does the new lease accounting standard impact real estate leases?

Yes.  There is very little that is scoped out of the new lease accounting standards. Leases involving property/buildings, property improvements and real estate are all covered under the new standards.

Will the lease accounting changes impact my bottom line?

We anticipate very little, if any, impact on the bottom line / net income as a result of the accounting changes. However, we do anticipate there could be additional costs associated with preparing for the implementation by organizations that have significant leases. Those costs could include, but not be limited to additional internal staffing / resources and lease accounting software, as well as outside consultants to assist with the implementation.

Will the lease accounting changes impact my taxes?

We don’t anticipate an effect on net taxes.

Is my data safe in simpLEASE Accounting (simpLEASE)?

Yes, all your data is encrypted from the moment it’s entered into the system (this includes uploaded documents).

Can work be distributed among users using simpLEASE?

Yes, simpLEASE has a built-in workflow that allows users to enter lease data, which is then reviewed and approved before it is sent to your accounting system.  Multiple users can be entering and reviewing leases simultaneously.

Can simpLEASE interface with my current accounting system?

Yes, simpLEASE can provide data in a wide array of formats for easy import into most accounting systems.  simpLEASE can also capture data electronically from your accounting system that can be used for validation and exporting.

Can simpLEASE help me track my leases in any way?

In addition to storing active lease specifications based on the new accounting standards, simpLEASE can track a wide variety of details about each lease.  With an unlimited number of user-defined fields, you can track each lease and associated relevant data.  Payments, estimated taxes and due dates can be tracked for each lease. 

Can I store lease agreements and other documents associated with the lease in the system?

Yes, simpLEASE allows for an unlimited number of uploaded documents for each lease.  The system has a definable data retention period that can automatically purge data as per your document retention policy.

Can I use simpLEASE to ensure there are internal controls over lease accounting?

Yes, simpLEASE can help you ensure that your leases are accounted for in accordance with the guidance.

Where is my data housed in simpLEASE, and is there a SOC report available?

Data is housed at a third-party service organization’s data center, which does have a SOC report covering controls.  Additionally, there is a SOC report covering the simpLEASE application.