Lease accounting and FRS 102: What you need to know

The first step to lease accounting compliance is to outline what your current lease activities look like with a comprehensive audit.

This audit should aim to review and record how you handle:

• lease procurement
• data capture
• lease management
• accounting and reporting practices.

This first step gives you and your team a clear idea of how you currently manage lease accounting and reporting; basically, it gives you a strong starting point to enact strategic planning.

Conduct an initial assessment of FRS 102 to understand the potential effects of the new standard on you and your organisation.

Review the Financial Reporting Council’s ‘Amendments to FRS 102’ report and begin evaluating the impact it will have on your accounting practices, including:

• financial statements
• financial metrics
• key performance indicators (KPIs)
• established accounting policies
• processes and tax considerations.

Pay particular attention to FRS 102 Section 20, which dictates disclosure requirements. Do this before you start capturing data, to ensure you can satisfy all the disclosure requirements.

Once you have a strong understanding of all FRS 102 requirements, it’s time to begin reviewing your lease contracts and capturing, extracting and processing relevant data.

Because changes to FRS 102 require you to bring leases onto the balance sheet, you’ll be dealing with knock-on effects like:

• Managing a lot more lease data than previously
• An increase in disclosure requirements for lessees
• An impact on your organisation’s financial statements.

Before you begin taking action, set aside some time to define what successful implementation looks like for your organisation – and how you’re going to make that happen.

Consider establishing how and when you will:

• Execute a rollout strategy
• Carry out testing to iron out any kinks
• Train your team on new legislation and best practice
• Monitor outcomes during the transition phase.

Once you’ve got the milestones laid out, it’s time to devise a new process architecture that aligns with the required changes. You may wish to think about establishing governance structures, data standards, and models.

While FRS 102 is designed to make financial accounting requirements clearer and easier to abide by, it does make calculating and reporting on leases far more complex.

Thankfully, there are plenty of software solutions out there – many of which are already well ahead of the game and poised to help you ensure compliance with FRS 102.

Finding the right software for your needs shouldn’t be an afterthought. Make it a priority to find your ideal lease accounting software partner; it’ll make adhering to requirements easier from the very beginning.

Once you’ve got your ideal system in place and everyone’s ready to go, it’s time to start producing the necessary reports and financial statements under the new standard.

Expect some snags and be ready to review outcomes and adjust timelines and workflows accordingly.

To maintain compliance in the long term, you’ll need to develop a sustainable lease accounting strategy.

In practice, this might look like setting up:

• Regular, ongoing audits of lease agreements and accounting management practices
• Ongoing training for staff, including refreshers for existing team members
• Fostering a culture of continuous improvement of lease accounting processes; e.g. Opening the floor to staff for ideas on how to improve processes.