Private companies are finding compliance with Accounting Standards Codification 842 (ASC 842), the Financial Accounting Standards Board’s new standard on lease accounting to be a complex task, according to a recent survey from LeaseAccelerator. Private companies with a calendar year-end have until Jan. 1, 2020 (or varied dates thereafter, depending on whether they have a fiscal or calendar (year-ends)) before ASC 842 becomes effective. However, the compliance efforts of public companies—that had earlier deadlines for compliance (and varied depending on their fiscal or calendar year-ends)—offer some lessons that private companies can learn from.
Notably, public companies learned that the complexity of the preparation effort can be substantial and, perhaps not surprisingly, the time required to implement the standard exceeded all expectations. There are specific technical accounting challenges encountered with the implementation. In addition, companies found it difficult to identify and implement the systems needed to support adoption of the standard and maintain its ongoing accounting and disclosure requirements. LeaseAccelerator reports that almost 55 percent of companies are finding the lease accounting project to be more complex than originally anticipated. Collecting data, modifying business processes and project managing the enterprise-wide effort are the top three challenges.
The following are three lessons private companies should consider when implementing ASC 842:
1. Underestimating challenges
With only 12 percent of private companies indicating that they have already completed implementation, a majority of companies have severely underestimated the effort and time required to implement the new standard. The biggest challenge, according to those who have started implementation, was identifying the process for centralizing copies of all contracts and related amendments and that it required a significant commitment of resources, time and dedicated attention to detail. Compared to the revenue recognition accounting standard (ASC 606), 75 percent of companies are finding the new leasing standard to be just as much or more difficult to implement. Nevertheless, even companies who are on or ahead of schedule with its implementation may be misjudging the work effort remaining before Day One compliance, much like public companies did. Public companies in the first quarter of adoption struggled with issues such as proving the accuracy and completeness of their lease population.
2. Choosing a technology solution
Given the ongoing calculations, reporting and disclosure requirements, a technology solution can help any company’s compliance with ASC 842, yet only 20 percent of private companies have selected a software vendor. With so many lease solutions available, what are the critical factors for choosing a solution?
Companies often choose technology solutions based on price, functionality, user interface and, of course, the ability of the system to handle ASC 842 accounting. Private companies should consider asking vendors for information regarding:
- Client references to understand the pros and cons encountered when implementing a system
- The level of support from the vendor
- Key items on the vendor’s road map
- The capacity of the vendor or a third party to implement the system
- The ease of the abstraction process
3. Data abstraction
Abstraction of the lease data is one of the longest most arduous parts of the implementation process. This process can be made more complex if entities have not developed a robust plan to help guide the abstraction process. Some key considerations:
- Lease portfolio: Understand the breakdown of leases between (a) real estate, non real estate, number of assets and (b) language (e.g., foreign language) and prepare a populated listing of all leases.
- Select technology solution: Before abstraction can begin, it is preferable to have the technology system selected and the minimum configuration should be completed (minimum information that system requires, such as the legal entity list, cost center, general ledger accounts etc.).
- Practical expedients: Summarize all practical expedients elected which can affect the data abstracted including nonlease components.
- Non contract data considerations: Non-contract data is often required and can vary based on the technology solution selected and a company’s specific accounting policies. Non contract data can include lease term considering renewals and terminations, discount rates, profit centers, etc.
- Deferred rent: Understand the composition of the balances and the impact of the transition.
Private companies should dedicate enough time in 2019 to adopt the new lease accounting requirements as well as invest time into testing and training their teams in order to achieve success.