Last month, the Financial Accounting Standards Board issued updated lease accounting guidance (Topic 842) of accounting principles which provides some narrowly targeted relief related to how companies account for real estate.
The update will require public and private companies to “amortize leasehold improvements associated with such common control leases over the useful life to the common control group,” and provides a work-around allowing most private and not-for-profit companies to use written terms to more easily determine if an agreement constitutes a lease, according to previous reporting from CFO Dive.
As artificial intelligence makes its way into the day-to-day operations of accountants, the tool can be especially helpful in the adjustment process for firms, especially private companies who are still grappling with the new standards.
With the new guidance specifically, AI will “facilitate and make the adjustment process easier, but it won’t take an accountant's job,” said George Azih, CEO and founder of LeaseQuery, a lease accounting software company.
AI to prohibit ‘financial games’
With the new guidance from the FASB, operational leases are required to be disclosed on the balance sheet, both as an asset and a liability, in the same way as capital leases. Before this, operating leases were disclosed as expenses on the income statement and in the footnotes to the financials.
“Your liabilities are going to explode,” said Azih. Additionally, it is the simple questions of lease accounting that often get overlooked where the idea of true AI can make a big difference for firms.
“When does the lease start? That's a very basic question that causes a lot of confusion. Is it the date the lease is executed? Is it the commencement date that's written on the lease? In lease accounting, the lease starts the day possession is passed from the lessor to the lessee,” said Azih.
The role that AI can play, is correcting itself when figuring out data points such as this, and prohibit lessees and lessors from playing “financial games,” said Azih.
Day two accounting
Where AI is really going to come into play, especially in helping small businesses scale, is “day two accounting,” according to Azih. “Day one is when you actually transition to these new standards that are set and day two is when you actually identify what the issue is,” he said.
For example, if a modification is made on a lease, “AI can easily figure out an extension, as of the date of the modification, and come in and say ok this is the effective date of modification and this is where it’s going,” said Azih.
This is especially important for a company looking to scale, as they can grow outside of the pace of their people.
“In the office of the CFO, your tech strategy is your strategy, and using automation and AI allows companies to scale, meaning grow outside the pace of people,” said Joe Schab, president and COO of LeaseQuery in an interview. “You're no longer tethered to how many people you have, it's tied to what value you can bring to the marketplace.”