At National Lease Advisors, we have helped many companies get through a smooth adoption of the new lease accounting standard, ASC 842. Many of these companies had attempted to take on the accounting adoption alone but realized they needed significant assistance, so they brought us in after the process had already begun. Based on these instances where we entered the picture late, we have seen a variety of roadblocks and lessons learned.
Here are what we have observed as the six common mistakes to avoid when adopting ASC 842. If you are not familiar with the new lease accounting standard, check out this article first!
Common Mistakes Observed
1. Not Allowing Enough Time for the Process
For a company with twenty or more leases, the process should have commenced in the first quarter of 2021, if not sooner. With year-end reporting and tax obligations, many companies are now punting the effort until the second half of the year, and that will create challenges.
The publicly traded companies we worked with knew their financials were under more scrutiny and they would need lots of time to successfully convert to the new standard. With their January 2019 deadline, most anticipated and planned for a process that could be completed in twelve months or less. Even with the allotted timeframe, there was often a scramble at the end to test systems and debug remaining issues. In hindsight, I think most would agree that they should have given themselves more time to navigate the potential pitfalls and hurdles this standard imposes.
2. Not Gathering the Right Players
One of the biggest mistakes we observe is the burden of the adoption being put solely on the accounting teams. Unfortunately, this is not a project that accounting can handle alone. While it is true that ASC 842 directly impacts reporting on financial statements, the knowledge and input from the real estate, facilities, and procurement teams, as well as a good lease administrator are critical to ensure completeness in the process.
Relying solely on the accounting team can result in challenges because they typically do not know the data points required to calculate the lease liability and right-of-use asset correctly. For example, a test that needs to occur for each lease is the reasonableness of exercising the available renewal options. The real estate team will best answer this question since they can evaluate if the terms are favorable or if one of the other metrics applies. What I have seen is that some accounting teams assume all the renewal options will be exercised without adequately evaluating them first. The result is an unnecessarily inflated lease liability on the balance sheet.
Accounting plays a vital role in the adoption and ongoing reporting, but a lease administration partner that works with real estate and purchasing is critical to input and maintain data accurately.
(Related blog: Bringing Your ASC 842 Team Together)
3. Relying Too Much on Software Systems
Calculating the lease liability and right-of-use asset can be challenging, especially as the number of leases increases. An Excel spreadsheet might work for one or two leases but quickly becomes risky as the number of leases increases, making it challenging to maintain accuracy. As a result, many companies are rightly relying on software solutions to calculate the lease liability and right-of-use-asset figures that will hit the balance sheet.
The mistake is to believe the software will be the solution when it is only one of several tools required to ensure long-term success. We have observed lease abstractions going into the system that had errors, flawed assumptions, and not maintained with leasing activity. These issues, of course, result in inaccurate reporting and defeats the purpose of the adoption.
While there is no doubt that software will play a key role, do not expect it to get you across the finish line when it comes to meeting ASC 842 requirements. To be successful, you need to have a strong team preparing the input and maintaining the system long-term.
4. Choosing the Wrong Software Solution
It has been amazing to watch how the introduction of ASC 842 in 2016 created an entirely new software sector. There are now dozens of software companies claiming to have the best system for lease accounting, and some can cost upwards of six figures to implement. Unfortunately, the fancy and smooth-running product demonstrations do not always translate to the experience. I have seen too many companies jump into systems and struggle with software bugs and more complicated inputs than anticipated.
It is important to evaluate several options and select a system that is right for your situation. At National Lease Advisors, we always evaluate the client’s specific portfolio and long-term needs and have a handful of platforms we recommend based on our experience. An educated decision can make all the difference and potentially save significant money and headaches in the process.
5. Underestimating the Challenges of Identifying and Gathering Leases
One of the observations I made while helping public companies adopt ASC 842 was the challenge of identifying leases and gathering the appropriate documents. Many agreements might take the form of service contracts but qualify as leases under the new code. It was eye-opening to witness companies that thought they had all their documents in a centralized system end up spending months searching for missing leases or amendments.
6. Not Utilizing the Experience of a Lease Administration Partner
The adoption of ASC 842, and the long-term maintenance of the data, requires a strong lease administration partner. Too many public companies struggled through the adoption only to realize it took much more effort than anticipated and have acknowledged that maintaining the data accurately requires a team of experienced experts.
A good lease administrator plays a vital role in protecting a company’s investment in the adoption process by maintaining the system long-term. Without ongoing and proactive maintenance, the data and reporting will become error-prone and inaccurate.
A third-party lease administration partner like National Lease Advisors can be the one constant to ensure success. While individuals within companies may change roles, get promoted, or leave, a great insurance policy is to partner with an experienced third-party administrator who will ensure that knowledge and systems are maintained.
For all your ASC 842 lease adoption questions and needs, reach out to an expert at National Lease Advisors today. We have the experience, and our team is ready to help.