Frequently asked questions about ASC 842 implementation
Companies that have recently implemented ASC 606 may be forgiven for thinking that they can use their experience to implement the new ASC 842 standard on their own. It doesn’t take long for them, however, to realize that the process is more complex and requires more resources than may be available in-house.
A discussion with three members of RSM’s technical accounting consulting team revealed some tips on addressing common challenges regarding the implementation process:
What are some common misunderstandings about 842 implementation?
Iyaye Amabeoku (IA): Companies are generally not aware of the amount of time and the resource requirements associated with implementing the standard. In addition, they often do not consider the need for a technology solution to assist them in complying with the standard. Many companies believe that they can continue using spreadsheets to manage their leases; in some cases, this may be possible, provided they have a small number of leases in their portfolio. But they may not have enough time before the implementation date with this approach.
Michaelle Keiffer (MK): Many companies are looking at this simply as a compliance exercise. But it’s really an opportunity to look at a neglected area to get the leasing process right. By taking a holistic approach and collaborating among many business units, implementation of 842 could result in a centrally organized lease management structure with controls to manage costs. So it’s a chance to assure compliance as well as improve current processes.
Prachi Jain (PJ): And because the leases are not centrally managed, it’s not unusual for some companies to not know how many leases they have. “I didn’t even know we leased these things” or “Why are we keeping this for so long?” are common reactions.
What should companies be doing when they are looking for software?
MK: Compared to a spreadsheet, lease accounting software provides greater transparency into leasing decisions, such as terms negotiated, vendors used and the like. The software provides businesses with a number of advantages, including increasing their buying power if they have multiple leases with one vendor. It also helps inform strategic decisions, like whether to lease or to buy.
IA: Because ASC 842 is a new standard, all software solutions are evolving. Customers need to understand what their needs are and what the software vendors are selling them. For example, is this software going to be used just for accounting or do they plan to use the lease administrative functionalities of the software as well? A business case requirement should be conducted, taking into account the needs of the different departments that would be using the software. Based on this analysis, the company decides on an appropriate software package to use. At a minimum, the accounting and real estate groups, along with IT, should be involved in the vendor selection process
PJ: Typically, there are two scenarios. In one, corporate accounting takes the lead and might reach out to real estate; IT is completely left out of the decision. This approach creates a lot of issues during implementation. In the second scenario, IT is aware of the need, and tries to improve the IT environment by setting up new systems without the business side involved or the business needs met. So implementation falls apart. Obviously, neither scenario is ideal.
Does implementation of a new system require a lot of capital expenditure?
PJ: The software implementation can be expensive. Companies are often not able to use their current systems, so they need to go out to find a vendor and purchase an in-house system. Fortunately, solutions are often cloud-based, so the right vendor can help keep the costs down.
Do company employees need to be trained in implementation?
PJ: Some companies think they can just manage it all from corporate headquarters. As many of them are decentralized and global, there needs to be a plan to deploy tech everywhere. But controls are more difficult to manage in the aggregate if the company uses different platforms in different locations. Other companies realize they can't do it themselves. So after they’ve gone through the effort to collect data, they at least consider training.
IA: There are some differences between US GAAP and IFRS, as well as between IFRS and local GAAP. Lack of training on these differences could lead to issues in treatment of lease transactions and have an impact on group reporting. All employees affected by the new standard need to be provided with some level of training regarding the changes that being implemented.
Is there a role affected by the new standard that is not being considered?
IA: Surprisingly, tax is the last area on people’s minds. Companies will need to assess the deferred tax implications of having operating lease right-of-use assets and lease liabilities on their balance sheet, as well any tax planning implications that may also arise. Another role not considered would be the treasury group, if applicable. This group may be tasked with helping the company determine the incremental borrowing rate or discount rates to be applied to the leases.
MK: Some companies are so focused on compliance that they put off tax to the end.
Who should be involved to ensure an effective transition?
IA: You have to have a sponsor; generally, this is someone at the executive level. Companies should set up a strong steering committee, to navigate the process, set the tone and address obstacles and impediments early on. Companies should also identify a working group committee that can head up the day-to-day activities and provide feedback to the steering committee.
Are companies seeing any value in implementation of the standard?
IA: Real estate personnel will likely be excited about this, because it will give them more control over managing the business under their responsibility.