Leasing standard deferment should not stall implementation
INSIGHT ARTICLE |
On Nov. 15, 2019, the Financial Accounting Standards Board (FASB) issued its long awaited Accounting Standards Update No 2019-10—Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. This update defers the effective date of Accounting Standards Codification (ASC) 842, Leases, for organizations that are not public business entities. This means that organizations that are not public business entities (except for nonprofit organizations that have issued or are a conduit bond obligor for securities that are traded or employee benefit plans that file or furnish financial statements with or to the Securities and Exchange Commission) have one more year to implement the new leasing standard. ASC 842 is now effective for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.
Organizations had noted the struggles they were facing with adopting the standards, and as such, the FASB granted the deferral for one year. However, organizations should not delay taking steps to begin implementing the standard, and we have compiled a list of considerations to highlight why (note, this is not an exhaustive listing, and other factors may apply as to why implementation efforts should begin now):
- Leverage existing implementation efforts: If you have already begun an implementation process, do not stop. Setting this work aside with the hope of picking it up later in 2020 may lead to inefficiencies, duplication of efforts and stale work. Rather, revisit your implementation road map and update the timing of your implementation activities to spread them out into a less compressed timeframe.
- Implement in stages: Due to the level of effort and costs associated with the implementation of the new standard, organizations can now divide the implementation process into phases over a period of time and make it a more manageable process. For example, implementation can be divided into assessment and implementation phases; with the information learned in the assessment phase, organizations can better plan and budget for the implementation phase (especially if consultants will be engaged to assist with the implementation efforts).
- Address resource constraints: One of the biggest implementation constraints for most organizations relates to the availability of resources within the accounting function as well as conflicting operational functions in other parts of the organization that deal with contracting. Organizations can now plan their implementation activities around staff availability, and can better prioritize on the conflicting priorities that exist within the organization.
- Assure completeness of the lease portfolio: Organizations generally maintain good controls over their real estate leasing portfolio; however, the same cannot always be said about the non-real estate portfolio (e.g., equipment, machinery, auto, IT, etc.). We have seen external auditors putting a lot of focus on how organizations assess not only their lease portfolio but other contracts that could be or contain leases. Organizations should use the adoption extension to develop a sound process to identify all of their leases (both known leases and potential embedded leases contained in service arrangements). Starting this process sooner will result in more timely identification of unknown (embedded) leases and a reduction in surprises that could have a material impact on financial statements resulting from the adoption.
- Address complexities associated with data abstraction: Abstraction of the lease data could be one of the most time intensive aspects of ASC 842 implementation. Organizations should develop a comprehensive abstraction playbook that would allow them to methodically abstract their lease data over a sufficient period of time, rather than rushing through the process. Organizations should also factor in time to address any issues or questions that arise during the abstraction process, as getting the data entered completely and accurately will drive the correct accounting.
- Select the right lease technology system early: Organizations should use this opportunity to develop their business requirements relating to the selection of a lease technology system, and to demo these systems prior to making a selection. Organizations should take advantage of the extra time the deferral provides when selecting a system to focus on evaluating the benefits of a lease system beyond accounting for ASC 842. These benefits include the potential to eliminate existing manual processes in managing lease portfolios within an organization’s real estate group or/and IT teams. The selection of the wrong system could lead to significant complications during the implementation effort. Lease technology vendors have indicated that they are willing to provide competitive pricing to those organizations that sign on to their system in 2019 and early 2020 and that they have implementation resources ready and available. Focusing on your system vendor contract early provides potential for greater flexibility in pricing as opposed to delaying and negotiating later in the year. It is anticipated that qualified resources to help implement will become scarce as the year progresses.
- Leverage the lessons learned from public filers: Feedback from public filers has indicated the following:
- Underestimating the level of effort and time required was common
- Selecting an appropriate lease technology solution early is critical
- Abstracting data is a long process; not understanding your comprehensive lease portfolio can add additional time and costs to this process
- Identifying the right team (including external partners to assist) and having a strong project management function can lead to a successful implementation
Nonpublic organizations should heed these lessons and begin their implementations now in order to alleviate some of the issues public filers have noted in their respective implementations.
Organizations should not delay their implementation efforts because of the deferral, as implementation can be a complex and arduous task, and every minute counts.
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