Life sciences finance leaders share ASC 842 adoption insights
The transition may take longer than anticipated
INSIGHT ARTICLE |
A panel of life sciences finance leaders from the pharmaceutical, biotech and medical device sectors recently gathered to discuss Topic 842, “Leases” of the Accounting Standards Codification (ASC), which includes the new lease accounting guidance, at the annual CBI Finance & Accounting for Bioscience Companies Conference. Panelists talked about the complexities and fundamental changes to lease accounting under the new guidance.
Of note for life sciences businesses, the following technical accounting challenges emerged from the discussion:
- Proper evaluation—How does an entity determine whether a contract is a lease or contains a lease (i.e., an embedded lease)? This could include, for example, arrangements where a medical device company recovers the cost of a specific device placed at a customer location through the sale of consumables or where a pharmaceutical entity has a contract manufacturing arrangement that identifies specific assets at a supplier location. Careful consideration of the facts and circumstances of each arrangement will be required to arrive at the appropriate accounting conclusion in these and other situations.
- Identification of components—It is important to correctly identify the separate lease and nonlease components and interactions between ASC 842 and ASC 606, “Revenue from Contracts with Customers,” the new revenue recognition guidance.
- Classification—Lease classification considerations are also crucial due to an additional criterion added related to specialized assets with no alternative use to the lessor.
- Build-to-suit lease arrangements—There is new guidance related to build-to-suit lease arrangements, which may change existing practice for highly specialized buildings, such as lab space, where the lessee is actively involved in the design and specifications of the building.
- Technology considerations—Appropriate technology and software may be needed to address ASC 842 adoption. This may be particularly important for entities that have a large volume of complex leases.
Panelists agreed that one of the biggest challenges in adopting ASC 842 is operationalizing changes across the enterprise. In companies with multiple locations, as well as those that conduct business internationally, a comprehensive and consistent transition approach is key.
In addition, implementation could take many months depending on the complexity of your company’s lease portfolio. According to one of the panelists, an executive from a public life sciences firm, adoption transition took longer than anticipated; this is a cautionary tale for other businesses. The advice: Companies must start planning now. For companies with a December 31 year end, the adoption deadline is the quarter beginning Jan. 1, 2019 for public companies, and the year ending December 31, 2020, for nonpublic companies.
This infographic breaks down questions to consider before the new guidance is adopted. For further insights, check out the following:
While ASC 842 will affect leasing activities, technology solutions can help ease the burden that the new standard brings.
Given the complexities of ASC 842, consider these critical factors for successful implementation of the standard.
This resource center provides information about the FASB 842 lease accounting standard, guidance and implementation ideas.