It’s no surprise that the long-awaited changes to lease accounting standards have caused quite the ruckus in recent years, particularly as businesses scramble to understand and implement the complex new rules. In addition to understanding the new rule’s impact on an operational level, it’s also important for businesses to prepare for the various tax implications that are likely to ensue.

In a nutshell, the new lease accounting standards (formally referred to as ASC 842) require businesses to record all leases greater than one year on the balance sheet. This will require businesses to collect and analyze their lease agreements to identify leases and ultimately separate non-lease components from lease agreements.

Affecting virtually every industry in the United States, the increase in liabilities on the balance sheet will inherently change how those numbers are perceived and understood. Public companies were required to implement the new standard by December of 2018, while the changes go into effect for private companies beginning December 15, 2019.

 Here are seven of the major areas impacted by the new lease accounting standard:

There’s no question that the new standards will affect nearly every business’ accounting methods. Businesses may need to revisit certain aspects of their taxes, particularly with respect to characterization of leases, timing of income under IRC 467, treatment of tenant allowances, and treatment of lease acquisition costs.

The new rules require operating leases to be recorded as right-of-use (ROU) assets with a corresponding lease liability, consequently grossing the balance sheet. This will result in additional recordkeeping to track book-to-tax items. Book and tax basis items need to be reconciled to ensure that deferred tax liability (DTL) and deferred tax assets (DTA) are recorded correctly. Note that this is a temporary difference that will reverse over the life of the lease term. Furthermore, valuation allowance may also need to be considered.

Many states consider a company’s property when determining the amount of income tax to be allocated to the state. Because the new standard requires ROU assets related to operating leases to be recorded on the same line item as underlying assets, property factors (such as plants and equipment) may appear to be increased on a company’s balance sheet.

Ultimately, this will affect state apportionment for companies with activity in states that include property factors when calculating apportionment percentage. In addition, it will also affect state filings where a net worth-based tax is implemented.

The new standard will affect companies with related party leasing arrangements, as transfer pricing arrangements may need to be revised to reflect the arm’s length standard. The arm’s length standard relies on financial ratios and profit level indicators, which may change when companies begin to record all leases on their statements of financial position.

In addition to its effect on state and local income tax, the new standard will also impact foreign country income tax. The extent of the impact will depend on the particular tax jurisdiction and how income tax is calculated within that country.

Depending on the tax jurisdiction, ROU assets may be considered tangible personal property and must therefore be included in property tax filings.

Going forward, companies must determine whether a state will treat a lease transaction as a taxable purchase.

ASC 842 will have a wide-sweeping impact on virtually every business, and it’s best to prepare for the changes as soon as possible. If you have questions about the new lease accounting standards, or want to learn more about the potential tax implications for your business, please get in touch with us.

In a survey that asked 2,300 organizations about their month-end close, the bottom 25% needed 10+ days to finish, while the top 25% needed five days or less.

So, where do you fit on that spectrum? No matter what position you occupy, every accountant wants (and probably needs) to improve the time and labor-intensive close process that ends each month. At the very least, ensure you’re following best practices.

You need to be honest about what’s working with the month-end close and what’s not. Just as importantly, you need to be honest about your capacity for implementing best practices. Knowing how to perfect the month-end close helps immensely, but it doesn’t make the work involved any easier. Truthfully, many businesses that want to institute best practices simply lack the time, technology, or staff to achieve best-in-class accounting.

Instead of optimizing your own practices, consider outsourcing them. Each month you have talented, methodical, and insightful staff made up of educated accountants, ensuring you have a clean and efficient close.

Best of all, someone else handles the heavy lifting, including whatever it takes to consistently perfect the process. In that way, outsourcing transforms the month-end close and, by extension, the entire accounting department.

If you’re ready to join the top quarter of all companies, we can help. Contact us to explore all that we offer.

One of the more striking challenges for family offices is managing the plethora of advisors who serve the family but may provide conflicting or confusing advice.

To address this issue, a family office should appoint a “quarterback” to help coordinate advisors to ensure their advice supports the family’s big-picture strategies. In addition, the right quarterback can provide an overview of the office’s performance and improvement opportunities.

The right person for the quarterback role will likely depend on the family’s needs and relationships with staff members or advisors. Regardless of who performs the function, it’s vital to ensure someone is communicating with the family and other advisors to coordinate everyone’s efforts, ideas, and execution of the proposed plans. You need a quarterback who understands the game plan, can call an audible if needed, and execute the game plan with assistance from the rest of the team.

Often, the family’s wealth advisors, attorneys, and accountants work in functional silos and may offer well-intended support and expertise that families find challenging to understand.

Family members often wonder: Do we first talk to our tax CPA or attorney about a new issue? What is the most efficient way to ensure compliance and achieve a goal? How do we fund a great idea? What should we be thinking about for next year? How do proposed tax law changes affect our strategy?

Another challenge is that most family office advisors deal with a large book of business, and carving out time to think about client needs proactively often seems like a luxury they don’t have. Some families may not even like to receive a call that can cost them money if they haven’t asked a specific question. As a result, interactions tend to be reactionary and not tactical.

In these situations, the bigger picture can be lost. Some strategies might work for the narrow sense they are created for, but may not dovetail with the family’s broader needs. One well-meaning decision can create an issue for the family’s longer-term strategy.

Even worse, each advisor may want to be the “trusted advisor” and the quarterback. But many don’t have the right lens through which to operate. If all you have is a hammer, every problem is treated like a nail. So, picking the right quarterback is equally challenging.

One might say the family patriarch or matriarch should take on the quarterback role. However, they may not know what they don’t know. They only know their circumstance and may not understand their many options.

Also, they may be getting confusing advice. How often does a friend or professional acquaintance throw out an idea in passing, but the relevance to the family might not be readily understood? A few calls and thousands of dollars later, the idea turns out irrelevant to the family. How many times do you experience this before you stop picking up the phone?

For many, the right quarterback is a critical component to managing professional advisors successfully. The best choice may be a staff member, such as the family office’s CFO. It may be one of the current advisors. The family CPA can be a good choice because he or she will have a good overall financial understanding. In many cases, the right wealth management professional can play the quarterback role if their perspective is broad enough.

Or it may be someone independent, such as a generalist who knows enough to bring the right expertise together at the right time. It can be surprising how rarely advisors meet together, so their collective expertise isn’t leveraged.

In conjunction with the family principals, a designated quarterback can bring the advisors together consistently to coordinate their advice and ensure everyone’s ideas are serving the family’s broader purpose, philosophies, and interests.

If you need help identifying the best quarterback for your family’s needs, contact us. Our experienced family office team can discuss your goals, current staffing, and advisors and help you identify the best candidate.

Here’s a simple question: Would you rather continue to manage accounts payable manually or put the whole process into an automated workflow? Considering the amount of time consumed by staff and other resources in the AP process, most companies should jump at the opportunity to automate. Fortunately, that’s never been more possible than now.

Accounts payable automation is affordable, accessible, and impressively effective, leading almost half the businesses surveyed to report they’re investigating its potential. Most see automation as a viable way to increase efficiency and reduce fraud within AP – a process that has proved historically hard to perfect. The added benefit is that it can help to reduce the overall cost of processing payments as well.

If you’ve already decided to automate AP, you’re moving in the right direction. However, you will need to follow industry best practices to reap the benefits and ROI that you expect from this upgrade:

With so many kinds of AP automation software on the market, it’s important to choose a tool that fits both the budget and the business needs. Some options are far better than others.

Properly implementing automation software can take a few months to implement fully, but it’s time well spent to ensure that you’re maximizing the tool’s effectiveness. A lot of this is dependent upon how organized you are today. AP Automation is highly reliable as long as it’s set up correctly.

AP Automation software can handle the vast majority of AP workflows, but they have to be customized to reap the most benefits. Investing time upfront to challenge your AP process flow will pay off when you implement your AP automation software. Eliminate unnecessary steps and embrace the capabilities of the tool. This will allow you to reap the most benefit from it.

Just because you want to automate AP doesn’t mean you want everything paid automatically, without proper review. Establish approval levels that make sense for your business so that larger purchases (like new equipment) get reviewed by actual accountants. With an automated tool, you can set approval levels to maintain effective internal controls.

Exciting as the potential of AP automation may be, it can also be daunting. Even when you know what best practices to follow, companies struggle to successfully optimize AP automation software because they lack the experience, expertise, or expendable resources to challenge current processes and project manage a successful implementation.

The good news is that companies don’t need world-class tech teams to utilize world-class automation software. Outsourcing accounting services can help with product selection, implementation, and ongoing support. That way, companies don’t have to recruit expensive tech talent or wade through the complexities of implementing automation software.

Ultimately, outsourcing the implementation of AP Automation software is a BEST practice because it makes accounts payable automation more accessible and affordable while ensuring the technology is expertly implemented to deliver its full value. It’s the best of all outcomes, especially when compared to tackling automation on your own. When you’re ready to get serious about perfecting accounts payable, we have all the help you need. Contact us at your convenience.

Scope creep is the gradual addition of more and more activity, such as the need to manage an expanding array of entities or generations of the family.

Expectation creep, a form of scope creep, is the expanding need for relevant, timely information and reporting that the family office and its technology was not initially set up to provide.

One of the most effective ways to optimize family office performance is to consistently review the family’s needs and expectations, as well as the office’s capabilities. Like with any enterprise, it’s important to review and address any shortcomings on a timely basis to prevent inefficiencies and potential frustration among the family and staff. Scope creep can create inefficient processes, manual work, increased risk, and a lack of visibility.

In most instances, family offices are set up to handle straightforward needs such as paying bills, financial reporting, investment management, and supporting tax compliance. Generally, little thought is given to how the needs of the family will change over time, as it expands generationally, has greater and more complex financial assets under management, and acquires personal assets such as homes, vehicles, and art collections with their own management and accounting requirements.

As this complexity arises, many family offices do not adjust to these changing realities and, as a result, fail to meet the family’s needs and expectations. For example, reporting and analysis become increasingly important but the team, the technology and the organizational structure does not support it. Consequently, the team is constantly scrambling to provide relevant reporting, most often using spreadsheets requiring extensive manual manipulation and subject to errors.

Adding the bill pay and reporting activity for additional generations with a growing array of assets can strain the office staff’s software beyond the capabilities of a basic accounting package. As a result, the staff prepares customized reports manually, taking time away from other responsibilities. In some instances, the same performance data is compiled into reports using different formats to meet the requests of specific family members.

To reduce problems from scope and expectation creep, consider the following practices and questions:

Revisiting family office’s performance on a consistent basis helps you identify opportunities for improvement in a timely manner and makes it easier to maintain alignment between the family’s needs and the staff’s systems and capabilities.

Scope creep can be a huge problem for family offices. If you would like assistance reviewing your current situation and implementing a roadmap to meet your goals, reach out to schedule a brief introductory call with our team or visit our family office services page.

As companies adopt ASC 842, selecting and estimating the discount rates embedded within their various leases will play an important role in their implementation as well as their accounting going forward.

These decisions can be complicated by common misunderstandings about the different types of discount rates available, as well as the potential implications to the organization’s balance sheet.

Note: The FASB released a proposed update in September 2021 allowing a lessee that is not a public entity to make the risk-free rate accounting policy election by class of underlying asset, rather than for all assets under lease. Under this proposal, a lessee will be required to use the implicit rate when it is readily determinable (instead of the risk-free rate), regardless of whether the lessee applies the risk-free rate election.

Questions? Contact us to discuss the best approach to determining an appropriate discount rate for your leases, or for other ASC 842 implementation questions.

One of the many determinations companies need to make as they implement ASC 842, the new lease accounting standard, is calculating the appropriate discount rate for their leases.

For lessees, selecting and estimating the discount rate will have an impact on the lease liability and right of use asset (ROU) on the organization’s balance sheet. There are several options, each with potentially different outcomes, so making the most appropriate choice for your organization is a critical step in the process. Generally speaking, a lower discount rate results in a larger liability as there is less of an interest component to the calculation.

This is defined as the interest rate on a given date that generates the aggregate present value of the lease payments, and the amount a lessor expects to derive from the underlying asset following the end of the lease term.

To determine the implicit rate, the lessee needs to know some of the assumptions used by the lessor in pricing the lease. This includes the underlying fair market value of the asset under lease, the estimated residual value of the underlying assets at the end of the lease, and any direct costs that may have been deferred by the lessor. In many cases, this choice may be impractical because much of the information needed to calculate the implicit rate is not readily available to the lessee.

This is defined as the interest rate a lessee would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term and in a comparable economic environment. Among the ways to calculate an IBR are using your rate on existing debt or recent loan; the borrowing rate of similar entities with comparable credit risk; or an interest rate quoted by your lender if you were to borrow funds to purchase a similar asset.

The RFR is the rate of a zero-coupon U.S. Treasury instrument using a period comparable with the lease term. This provides a practical expedient alternative for private companies.

Making this decision became a little bit easier in mid-September as the Financial Accounting Standards Board (FASB) gave private companies and nonprofit organizations flexibility in choosing the discount rate used in calculating the value of their operating leases.

Under FASB’s revised guidance, an entity can choose between a discount rate such as an IBR and a risk-free rate for its leased assets.

The FASB also gave entities the option of selecting different discount rates for various classes of leases, instead of applying the same discount rate to all operating leases. This gives organizations the flexibility of calculating an IBR for high-value leases, such as real estate, and applying an easy-to-determine risk-free rate for low-value leases such as office equipment.

Lessees are required to disclose information about any significant assumptions or judgments to apply ASC 842, and this may include how they determined the discount rate for their leases. In addition, if a lessee elects the accounting policy to use the RFR, they should disclose this policy, assuming it is considered to be a significant accounting policy.

To learn more about choosing a discount rate or other aspects of your lease accounting implementation, reach out to our experts for help.

Many companies don’t realize they can use BlackLine’s reconciliation templates to achieve account accuracy, systematic consistency, accountability, and transparency while automating the reconciliation process – saving dozens of hours per month to be redirected to more meaningful close tasks. If you’re already using BlackLine for task management, reconciliation is an excellent way to get more from your investment.

Using BlackLine, you can standardize your financial close process with various reconciliation templates to help substantiate your balance sheet accounts. Some templates include standardized accruable, amortizable, bank account, and subledger; however, there are many other customizable templates to help you create systematic consistency for your company’s reconciliations.

1. Consistently documented purpose, preparation, and review procedures.

2. Established due date rules, dashboard visibility, and reports to monitor the timeliness of your reconciliation process.

3. Tracked Monthly or Quarterly reconciliation histories with substantiation.

4. System controlled segregation of duties between the reconciliation preparer and approver(s) to significantly mitigate risks.

5. Global or account specific:

6. Controls that decertify a previously completed account reconciliation if an account balance is updated to ensure reconciliation accuracy is maintained.

7. Many pre-built connectors make it easy to import ERP trial balances into BlackLine in both the account and financial reporting currency using flexible frequency options.

8. Templates can also be used from account grouping into a consolidated reconciliation template.

9. Additionally, rules can be configured to auto-certify (review/approve) an account:

If you’re looking for a more efficient way to reconcile your accounts, BlackLine’s reconciliation templates may be the solution. Our implementation team can help you leverage these templates to streamline and automate the reconciliation process.

If you want to learn more, contact our BlackLine Implementation team.

Private companies and nonprofits will soon be subject to the ASC 842 lease accounting standard. Adopting this standard is effective for annual reporting periods ending after December 15, 2021. For calendar year-end companies, the effective date is January 1, 2022. For companies with a fiscal year-end, the effective date would be the first interim period after their fiscal year-end (i.e., the effective date for a fiscal year-end of June 30, 2022, would be July 1, 2022).

Review your general ledger accounts, looking specifically for fixed recurring and variable payments for existing leases and other contracts, which may have embedded leases under the new standard. Embedded leases are determined by the lessee’s use and control over any identified assets in the agreement. The most common embedded lease is typically within an IT service contract if it specifies underlying hardware that may be included.

Create an inventory of your contracts and review key information in those contracts, including fixed payments, indexed payments, renewal options, residual guarantees, initial direct costs, lease incentives, and options to purchase. In addition, payments to the lessor may include fixed non-lease payments such as insurance, maintenance, and taxes. There is a policy election that allows these costs to be included should a company desire to do so.

Fixed lease payments are those recurring payments that are the same amount each month, including payments with a fixed percentage increase based on specified dates or anniversaries. In contrast, a payment based on an unknown future rate, such as the CPI index or lessee’s sales, are considered variable. These are treated differently under the new standard.

Policy Election Options:

 Practical Expedients Options:

Separate Election

Financing Lease

* Example is a 60-month equipment lease with monthly payments of $500 with an option to purchase of $100, which the lessee intends to exercise.

Operating Lease

* For example, an office lease with 60 monthly payments of $4,000 (for a total of $240k) would not be considered a major portion of a $2m building’s economic life of 30 years.

For more information or help with your ASC 842 adoption requirements, don’t hesitate to contact us.

For a lot of small to mid-size manufacturing and distribution businesses, there’s a conundrum looming over the accounting department. Often, these departments consist of just a few accountants, possibly a controller or accounting manager. Typically, the business owner serves as the de facto leader.

The team can handle payroll, accounts receivable, and accounts payable — meaning it can handle the most basic accounting functions. What many of these companies struggle with is the inability to plan for the future, forecast opportunities and obstacles on the horizon, and devise strategies accordingly. That’s the job of a CFO, and very few small manufacturers and distributors have one in their ranks.

The reason is that few of these businesses need one. Not full-time. Financial expertise and foresight are important, but small businesses don’t automatically require 40 hours of CFO input week after week. They may not be able to afford it.

That brings us to the conundrum: how does an accounting department hire a part-time executive? Fortunately, it’s a lot easier than expected.

What are CFO services? Think of them as the individual responsibilities of a CFO – things like forecasting cash flow, budgeting/planning, financial reporting, or contract negotiations – available individually and on demand.

When companies opt to work with an outsourcing firm instead of trying to hire a CFO, they get the expertise, specialization, and high-level accounting capabilities their team is lacking, but at a fraction of the cost. Maybe, more importantly, the needed assistance is available now, not whenever a qualified candidate accepts a job offer, which can take weeks or months.

Here’s an example of CFO services in action: Imagine a manufacturer needs to do a detailed costing analysis but doesn’t have the experience or sophisticated systems to get the numbers accurate. Their outsourcing firm provides them with a costing expert who understands the market segment and how costs affect sales prices, gross margins, demand forecasts, and labor needs. As a fractional CFO, the expert gives the company essential costing insights. Then, they return to the outsourcing firm until further assistance is necessary.

With CFO services, small companies don’t need to hire a CFO. They also don’t need to pay exorbitant compensation packages or make do with basic accounting resources that can only look backward. Even better than a part-time executive, CFO services are a kind of anytime expert.

Exceptional outsourced accounting firms provide two things. First, access to a full range of CFO-caliber accounting services delivered by experienced experts. Second, a serious commitment to tailoring CFO services to the client’s specific needs and changing circumstances.

We have a regional focus with global expertise. The former CFOs on our team come from diverse backgrounds and every facet of accounting, but they focus on individual industries, gaining true authority. So ask yourself, could you use CFO? If so, contact us.

As a business owner, you likely started your business because of a great product and a passion for your craft. Whether innovating the production of chocolate or sharing your family’s bread recipe with the world, analyzing accounting standards and tracking leases are probably low on your list of leisure priorities.

For years, we have been hearing about how the new lease accounting standard is going to shake up the way businesses record leases. For the Food and Beverage industry in particular, this new standard will have a significant effect on not only your balance sheet but the way banks and investors view your business.

In today’s globalized world, investor portfolios include domestic and international businesses. This has led to a need for consistent accounting methods to compare businesses using the same standards. The new lease accounting standard is an effort to bridge one of the largest gaps between U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS).

Under current GAAP, some leases are recorded on the balance sheet, and other leases are just disclosed in the footnotes. The new lease rules will require that all leases over one year be recorded on the balance sheet.

For businesses that tend to be “lease heavy,” it’s best to start planning for these changes sooner rather than later. For Food and Beverage businesses, leases include everything from facilities and manufacturing equipment to trucks and delivery vehicles. For companies with restaurants and storefronts, leases include suites, mall stands, and retail space. Businesses will need to collect all of their leases, know the terms, and record the values on their balance sheets.

Facility leases not previously recorded on the balance sheet must now be recorded as a “right to use” asset at the present value of the lease payments. This balance sheet loading is going to have a significant effect on how statements are viewed and understood.

Suppose you have a line of credit or term loan through a bank. In that case, the bank will typically require the business to maintain certain financial metrics, such as minimum working capital or maximum debt-to-equity ratios. These ratios indicate how much equity you have at risk compared to how much others are at risk based on what you owe.

Additionally, it measures the company’s ability to make payments as they come due. The resulting increase in liabilities will negatively affect both ratios. It’s a good idea to consult with your bank and adjust your ratios so you are not out of compliance with your loan covenants.

Start early, be meticulous, and seek professional guidance. If your business is particularly lease-heavy, there are software packages that will help track lease details and automatically calculate depreciation on the related assets.

Remember that you are not alone in the food and beverage community or the community. For public companies, this standard is effective for fiscal years beginning after December 15, 2018. Private companies would pay attention to lender and investor reactions and look at examples of public filings before the private company implementation date the following year.

Your CPA can help facilitate conversations with your bank and investors. Lending institutions will see a significant shift in how they view balance sheets, and CPAs can help clear up the confusion. Work with your bank and CPA to create a pro forma of what your balance sheet will look like with your leases recorded. It’s best to have these conversations well in advance to maximize the flexibility of your banks and lenders. Contact us to get help today.