The new year is here.
And that means you have to be thinking about a FASB 842 implementation for your private company.
You have questions.
And after a whole year of hammering out implementation with public companies, we have answers.
In fact, we learned so much from the industry’s first year implementing the new accounting standards changes, we’ve been getting a slew of questions.
And we’re answering 11 of the most commons ones to help you own your FASB 842 implementation in 2019.
Who’s impacted by this change?
All public and private companies are required to follow the new standards, but the deadline for many public companies is about to pass in January 2019.
The deadline for private companies is just one year away - January 2020.
With an average implementation timetable of 4 to 6 months - IF everything goes right - the experts recommend starting sooner rather than later. That’s because those companies with many leased assets will see the biggest impact.
Although real estate leases are often the largest line item, companies may have a whole boatload more equipment, technology, vehicle and other lease contracts.
Translation: There's a whole lot of data out there.
Organizations in the retail, healthcare, financial services, and telecommunications industries, for example, tend to have relatively large real estate lease expenses.
These will need to be capitalized.
But even businesses without leased real estate will need to address the new standards.
Will the new standards change lease negotiation, administration, or other business practices?
Yes, the new standards will majorly affect how you do business.
In fact, many companies will view the standards change as an opportunity to review and update leasing practices from stem to stern.
In some cases, the new standards will impact the buy vs. lease decision.
Lease negotiators may want to move away from gross leases to those that call out service rent and other charges that don’t need to be capitalized.
The practice of lease administration will come under more scrutiny by auditors and financial managers than ever before, so new levels of review and audit trails will likely be implemented.
When should companies start working to comply with the new standard?
The short answer is right now.
According to the Journal of Accountancy, almost one-fourth (23%) of companies surveyed by PwC and commercial real estate services firm CBRE said they hadn't started their lease accounting adoption efforts yet.
A Deloitte survey also showed 31.4% of more said their organizations were unprepared to comply with the new standard.
That means there’s a lot of work to do.
What are the potential consequences of non-compliance?
The SEC’s Division of Corporate Finance selectively reviews filings made under the Securities Act of 1933 and the Securities Exchange Act of 1934 to monitor and enhance compliance with applicable disclosure and accounting requirements.
Right now, only consequences for public companies have been outlined. But you can bet they’re going to be similar for private companies.
The cost associated with the following should deter companies from misstating their financials:
- Lawsuits from investors for the misstated financial statements
- Cost of bringing in fraud examiners to investigate (if it is determined fraud was involved)
- Cost of responding to an SEC Comment letter
- Bring in big 4 consultants to restate prior years
- Auditors getting fined for the misstated financial statements
Is AMTdirect’s FASB/IASB compliance functionality integrated with lease administration?
Our solution is fully integrated.
Some vendors are offering a bolt-on FASB calculator that sits between the lease administration system and the accounting solution or ERP.
This is a high-risk approach because many day-to-day leasing activities will trigger a schedule reassessment.
For example, exercising a renewal, accepting tenant improvement allowances, or any change to rent payments will require a schedule revision.
Since these activities are managed in the lease administration solution, an integrated compliance and management approach makes the most sense.
Has the solution been evaluated by CPA firms and financial reporting experts?
Compliance with the new leasing standards is complex, and there are many opportunities for incorrect calculations.
The best vendors have partnered with CPA firms to ensure accurate calculations and the appropriate application of the rules.
AMTdirect has been recommended by PWC, EY, CFGI and RSM.
Will the solution support all lease types?
Lease complexity is where we excel.
Most organizations will need support for both real estate and equipment leases.
Embedded leases and master leases are also common and should be considered. In addition to the asset type, look for a solution that supports both lessees and lessors.
Even if you aren’t a landlord today, you may want to sublease space at some point, so it pays to invest in a solution that can handle this and other complex leasing scenarios.
Is there an audit trail?
Of course. We offer full reporting on system activity.
It will be increasingly important to know who made changes to lease data and why.
You’ll also want a record of when transactions are posted and by whom.
Will the system easily integrate with your accounting or ERP solution?
We’ve been building integrations for 20 years.
We’re likely to have already built an integration with your current system.
This is important because once the lease administration solution makes the correct calculations for the capitalization schedule, it will need to send the appropriate journal entries to your accounting or ERP system.
Does the solution provide adequate security?
Yes. Security has always been an important lease accounting consideration, but new mandates make it even more of a concern.
At AMTdirect we conduct SSAE 16 audits.
We also offer three-factor authentication to ensure your system is accessed by only those authorized to do so.
Does AMT provide implementation services?
AMTdirect offers many flavors of implementation and support.
You may not know from the beginning how much help you’ll need implementing your new technology and getting ready to comply with the new standard.
Most vendors will provide technical implementation services.
But the best partners also have a team that can help with lease abstraction, data migration, and operational consulting.
We’re ready to support you in the capacity that meets your project plan.
Conclusion: Your Private Company’s Answer to FASB 842 Implementation in 2019
If you’ve learned anything from these FAQs, it’s probably that FASB 842 implementation for your private company is going to be no walk in the park.
It’s going to take long hours, coordination of all of your teams, and money.
In fact, more and more of each of these things the longer you wait.
Because the data has been the monster in the closet, we created The FASB 842 Lease Data Checklist & Worksheet.
It’s a free, comprehensive checklist of the 55 data elements you’ll need to collect in 2019 to correctly classify and report on each lease.
Don't wait until the new year to begin FASB 842 implementation. Kickstart it now to avoid major problems down the road.