By Mike Hammerslag
New accounting regulations from FASB/IASB are driving changes to the ways fleet lessees and operators are running their businesses. The new guidelines for ASC 842/IFRS 16 take effect for public companies this month and for private companies, under ASC 842, a year later.
While CFOs, accountants, auditors and controllers are well aware of these looming deadlines, corporate fleet managers may not be, and the changes required to achieve compliance are more challenging than many realize.
While managing a fleet has always been a tall order and a substantial expense category, the new regulations dictate that those assets must now be placed on the balance sheet. With accounting for these “right of use” assets now being a financial disclosure issue, the stakes are high, and you need to get ready quickly to deal with the changes.
Not Just One Lease for One Asset
What makes lease accounting complicated is that within a single master lease agreement for a fleet, individual items and assets are constantly moving in and out of the lease. Previously, the financial accounting system did not have to be concerned with that, as the assets remained off the balance sheet.
Here is an example of just one challenge with the new regulations. Suppose the transportation division of a major manufacturer signs a ten-year master lease agreement to lease truck tractors and trailers to move components, as well as finished products, between facilities, to distribution centers and to end customers. At the outset, the transportation division has a need for 50 tractors, which are ordered, delivered and put into service. Then, ten months later, due to a shift in business strategy, there is a need for 40 additional box trailers, added to the lease, then another 10 automobiles for salespeople and executives.
These bulk transactions, each with different lives (tractors 10-years, box trailers 7-years, and automobiles 5-years) need to be accounted at the asset level. This is particularly important and challenging when one-off changes occur. Properly making those individual changes is an operational challenge. On top of that, those changes now impact the needs and functionality of the accounting software. Lease accounting now needs to occur not just on the macro level, but on the micro, or individual asset level, as well.
Achieve Compliance Without Operational Disruption
These changes in lease accounting are coming fast, and accounting departments are rushing to achieve compliance with changes that include updates to software infrastructure, normalization of fleet data and operational process changes. This all has the potential to cause havoc with how your fleet runs and supports your mission. It's recommended with all of this that you find an ASC 842 software solution that is flexible and powerful enough to scale with you as you grow your organization and as updates are made to compliance standards.