Start by looking at your requisition process
The first thing you should do when developing an inventory of your leases is to look at how your company goes about its requisition process. Which departments are involved?
Do you have supply chain or purchasing departments that initiate requisitions? What about individual controllers in certain regions? Once you understand your company’s process, you can identify the departments that you need to engage in building your lease inventory.
Large organizations will already have walk-throughs for this as part of their auditing process. If this is the case for your organization, reach out to your company’s auditors. If you can follow their auditing walk-throughs, you won’t have to reinvent the wheel.
Engage the right departments
Because Topic 842 requires that you record your embedded leases, you need to evaluate contracts from a variety of departments to determine if they contain embedded leases. A common mistake many companies make is going straight to their real estate department to create their lease inventory. While real estate leases are a piece of the puzzle, you must look beyond the obvious to be in compliance.
Once you have an understanding of your company’s requisition process, you can pull together a cross-functional team to gather all of your company’s contracts. Forming this team is critical to ensuring that your inventory is complete.
Legal needs to approve large contracts, so they should be involved. Supply chain, purchasing, or procurement will also be able to provide a list of vendors. IT tends to manage lots of vendors, so you’ll want to include them. And since accounts payable handles payments, they’ll have a list of vendors as well. For companies with a large geographic footprint, the finance managers or controllers at each location will also have lists of vendors.
You should have a leader in place to drive the process by establishing deadlines and being on point for questions or concerns. The team should meet at least weekly to share updates on progress.
Document all of your contracts in a template
We can’t stress how important is to work methodically to ensure accuracy. To keep everyone on the cross-functional team marching to the beat of the same drummer, create a Contract Inventory Template in Excel that they can fill out.
Include the following columns on your template:
- Vendor name
- Contract value
- Contract start date
- Contract end date
- Contact information for the person who has a copy of the contract
Cross-check your template for accuracy
Once each department has entered its information, you’ll need to cross-check it for accuracy. Go to your purchasing, supply chain, or procurement department and get a list of vendors. Then get an independent list of vendors from your accounts payable department. Compare the two lists and merge them into one.
Compare that list to the completed Contract Inventory Template. If there are any contracts listed on the vendor list from your AP and procurement groups, that aren’t on your Contract Inventory Template, add them to the template and plan to investigate them further.
Evaluate contracts for embedded leases
After you’ve cross-checked the Contract Inventory Template, you have to go through the process of examining those contracts to determine if they contain embedded leases. The general rule is that if a contract has an identified asset and “control” of said asset is passed to the lessee, then the contract contains an embedded lease.
Determining if your contracts contain embedded leases is challenging. It’s not as simple as looking for the words “lease” or “rent” in your contracts. One way to ensure accuracy is to use LeaseQuery’s Embedded Lease Tool, which enables you to evaluate each of your contracts in a four-step process.
Why you must revamp your processes
Many companies will use the commitment disclosure schedule to build their lease inventory. But let’s be honest, most of the time, items are missing from that schedule. Solely relying on it is unwise.
The commitment disclosure schedule is useful as a way to check for completeness. Make sure that everything listed on the schedule is also on the Contract Inventory Template that you’ve built.
There are no shortcuts
Unfortunately, we don’t get extra hours in the day to comply with the new standards. Today’s companies are all about efficiency, but you shouldn’t prioritize speed over accuracy. Remember, if you’re audited, the auditors will be more interested in thoroughness over efficiency.
Communicate the seriousness of compliance to your cross-functional team. They aren’t aware of the accounting regulatory environment, so they need to understand that jobs and the company’s reputation are on the line. Knowing the importance of compliance will encourage them to participate with a sense of urgency.
While this will be a time-consuming process, it’s an opportunity to get things right. If you set the right foundation, you’ll be in good position to comply with the new standards going forward. Our step-by-step Lease Accounting Compliance Guide walks you through how to develop the right processes.