Welcome to the first in a series of articles to help companies understand and prepare for the challenges of meeting the adoption deadline of ASC 842. Having spent the last few years working with public companies that needed to adopt the new standard by January 2019, I know how critical it is for private companies to be moving forward with the implementation process as soon as possible. In this first of the series, I explain why it takes a team approach and give my thoughts on the players who need to participate. Future articles will get into software solutions, lease determination procedures, practical expedients, and more.
ASC 842 Overview
In just over a year, private companies will need to implement a new accounting standard for the reporting of lease obligations. The new standard, ASC 842, was issued by the Financial Accounting Standards Board (FASB) in 2016 and goes into effect in January 2022 for private companies. ASC 842 will require companies to include lease obligations that are longer than one year on their balance sheet as a Lease Liability and a Right-of-Use Asset. Before this change, these lease obligations only appeared on the income statement as an expense for the period.
Team Approach Is a Must
A successful adoption will require more than one or two people’s involvement. Most companies default to an accounting team member or real estate/facilities leader to handle the project. While these two roles are critical in the process, limiting the burden to these one or two groups will ensure trouble ahead. A successful project will require a team leader or consultant who understands the complexities of ASC 842.
A seasoned consultant who has gone through the process will prove to be a lifesaver. I can share from my own experience that I have learned a lot since I assisted my first client with the adoption. I have been fortunate to work with auditors from the big four accounting firms and clients who invested the time and resources to do the adoption right. I have also learned from other experiences where clients brought me in late and I saw policies and procedures implemented based on a lack of real understanding of the code. These flawed procedures will result in inaccurate reporting to the clients’ detriment.
What is important to understand when picking the players who will be part of the ASC 842 adoption team is that there are many data points to be collected and new processes to be implemented going forward. While the leaders in the adoption might be able to get the ball rolling, they typically don’t control many of the key data points and decisions, therefore the team must include a broader range of roles both within and outside of the organization. Each will provide a level of expertise and access to information needed to ensure success.
A successful project will require a team leader or consultant who understands the complexities of ASC 842.
The players will vary depending on the number of leases. A company with a portfolio of 10+ leases should plan on the following:
- Accounting Team Member(s): The accounting team provides essential understanding of how the organization is currently reporting lease expenses, has access to deferred rent balances, and can provide ongoing support with discount rate figures and necessary input for new calculations required after the implementation.
- Internal Real Estate/Facility Leader(s): Individuals who are involved in the day-to-day real estate activity play a key role in rounding up existing lease contracts and providing controls to ensure the adoption is followed in the future.
- Procurement Members: Since real estate is only one of many contracts that could be considered a lease, it is important that the procurement team be involved and understand what to look for both during and after the adoption. Some contracts may clearly stand out as leases, such as equipment leases, but others may slip under the radar without a procurement team keeping an eye on things. We’ll get more into these sneaky contracts in a future blog on lease determination.
- Real Estate Decision Maker: On the real estate side, you will not only need someone who can gather the leases but a strategic participant who can answer key questions about the assets in general. As an example, one of the data points required when accounting for leases is to make a determination as to the long-term role of the asset in the business model and how that plays into accounting for the renewal option.
Critical Third-Party Participants
- Lease Administrator/842 Consultant: Perhaps one of the most overlooked yet important players in the process is a third-party lease administrator who has experience with implementing ASC 842. One of the reasons FASB delayed the adoption for private companies to January 2021 (from an original date of January 2020) was due to the challenges and tribulations experienced by public companies. The valuable insights gained by a lease administrator who worked with public companies to adopt the new standard can help private companies avoid unnecessary pain and expense.
- Software Partner: Unless you only have one or two locations, the days of determining lease accounting in Excel are over. The new lease accounting standard has created an influx of new software solutions attempting to help companies with the adoption. Unfortunately, not all will survive, and many are still working out the bugs. A good lease advisor/administrator can help businesses find the right software solution for their needs, saving time, money and a ton of headaches. I will discuss this more in my next blog post.
- Accountant/Auditor: While the accountant’s and auditor’s role may be limited during the adoption process, it is important to keep your accountant or auditor informed as the process progresses to ensure they are on board with your decisions and there are no surprises when it comes time to begin reporting.
Timeline for Implementation
The original adoption for private companies was extended from January 2020 to 2021 when FASB saw the lack of understanding and attention being given to the effort in mid-2019. Too many companies mistakenly assumed the process could be completed in a few months when in reality there is much more work required.
Ideally, a company that isn’t already in the process of implementing ASC 842 should begin this quarter. There is no harm in getting your systems in place and tested a little early, but more importantly, you want to avoid having to report figures on your balance sheet that prove to be inaccurate.
I could go on and on about the roles that need to be played and processes that need to be followed as companies prepare for the new standard. There are other great resources on the web as well, but I encourage firms to bring in a consultant to help them understand the process. Please feel free to reach out to me directly with any questions or to discuss your company’s plans: email@example.com.