Good accounting relies on balance. Sharp accountants remain vigilant, lest an errant transaction disrupt the balance they’ve worked so hard to achieve. Maintaining financial balance requires a reconciliation process that includes validation and verification of the transactional source data against the general ledger to ensure that the system is and remains in balance.

Reconciliation is important to maintain the integrity of the system, gain trust in the system, ensure data is flowing accurately, and support General Ledger (GL) Balances for financial reporting and audit requirements.

Detailed reports should help the company stay in front of defects and process issues related to missing, incorrect, duplicated and or broken data elements, records and broken relationships across tables. Reconciliation also sets customers up for sound financial reporting in the future. 

Lease accounting questions

Several leasing and asset finance technology companies have sprung up in recent years with promises to make life easier for businesses in general and for accountants in particular. Not all of these companies will be a good fit for the average business.

When evaluating a vendor that claims it can help keep track of a business’s lease and loan contracts along with As-a-Service offerings, not only to enhance the efficiency of a business but also to manage tax obligations, you may want to ask a few accounting questions — and confirm the answers.

First and foremost, your accounting team will wonder, What kinds of reports are in the system? Specifically, you’ll want to ask the following:

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Q: Will your reports give me contract-level and/or asset-level balances, to keep me in sync?

If reports are too high-level, then when you learn that you have an out-of-balance problem, you may not be able to find the issue that’s causing the problem. That lack of knowledge can force you and your team to spend many hours tracking down the problem — hours you could have spent elsewhere, had the reports homed in at the contract level in the first place.

Q: How do I make sure that the lease and loan system will stay in sync with my third-party accounting system?

The march of technological improvement has led many to expect that kind of syncing to happen as a matter of course. You may be surprised to learn how often it doesn’t. Save your time and sanity by getting clarity on this question before you sign on the line that is dotted. Ensure that the new system will integrate smoothly with your accounting system and that safeguards are in place that will prevent your team from posting out-of-balance journal entries. 

Another important question — about your workload, yes, but also about the quality of your output is:

Q: Will you have to post manual journal entries to fix system errors? 

Our recommendation would be “no.” You shouldn’t be posting journal entries to fix system issues. As mentioned above, the system should have safeguards to ensure that it can’t post out-of-balance entries. You need to have an easy way to find the error if something goes wrong. 

Q: Does your system automate the lease classification and allow for contracts to be recorded with lease and non-lease components under US GAAP? 

A good system will automatically determine the lease accounting classification based on the transaction attributes (bargain purchase option, transfer of ownership, economic life test, PV of payment test). It will enable authorized users to override the classification defaulted by the system. In addition, the system should be able to bifurcate lease and non-lease components under appropriate methodologies, for example, ASC 842 and ACS 310. 

Q: Is your system able to use the appropriate accrual method for lease accounting? 

A trustworthy system will manage accruals on leases based on the conventions stipulated by either US GAAP or International/local Accounting Standards, as appropriate. For operating leases, this income should be straight-lined over the life of the contract. For capital leases, accruals should happen based on effective yield. 

Users should have the option to define their preferred revenue-recognition methodology for the first month. Configuration options should exist to either amortize income for a full month or prorate income from the contract start date through the financial reporting period end date.  

Other considerations: Have you considered taxes — that is, sales tax, property tax, and income tax? What kind of integrations exist to make my life easier when it comes to taxation? 

Q: For sales tax: Does your system integrate with a platform that can give you the correct decision and tax rate? 

Q: For property tax: Does your system export accurate asset information for filing requirements?  Does your system import accurate billback asset information? 

Q: For income tax: Does your system have adequate reporting, does it track asset-level depreciation, and does it support the appropriate rate tables for the type of equipment you’re leasing? 

Related to that: Would our company be able to re-cast items quickly? That is, can we easily fix a mistake or adjust tax-depreciation methods based on retroactive IRS changes or other new financial policies? 

These answers, too, can indicate how heavy your lift will be in the event of a mistake or a tax policy change. 

Software needs guardrails. Your vendor should install good ones. Do yourself a favour: Make sure that the guardrails you’re getting will preserve your company’s balance.

Diane Parisi is VP of Solution Architecture at Odessa.