A strange phenomenon is taking over the accounting world.
Even though there’s been a massive deadline delay for FASB ASC 842 compliance, most private companies are shrugging their shoulders.
In fact, 45% of private companies haven’t even started basic preparations for ASC 842 compliance. And 52% say the deadline change has halted their plans to move forward with implementation.
This passive attitude stems from the simple fact that some private companies don’t believe the new lease accounting standards apply to them.
If you fall into this line of thinking, we’ve got news for you.
There are actually few companies to which the new lease accounting standards don’t apply.
Because there are so many dangerous misconceptions floating around about what’s required with the new lease accounting standards and who’s required to follow them, we’re shedding light on this critical topic.
These 4 indicators should clear up the confusion for CFOs and controllers and safeguard against their private companies getting left behind.
Indicator #1 - Company Type
FASB ASC 842 compliance applies to public and private companies in the United States.
Public companies bore the brunt of implementing the new standard by having to face the first compliance deadline at the start of 2019. And even though many will be tackling year two of reporting under the new standard, 37% will only be starting implementation for the first time in 2020 because they’re so far behind.
This is in addition to the more than 6 million private businesses nationwide that will be required to implement the new accounting standard before January 1, 2021.
The only exceptions to this rule are for institutions of higher education and government organizations. These are special types of businesses that fall under the jurisdiction of GASB 87, a separate, but similar standard, to FASB ASC 842.
The other exception is for international companies with international leases. These businesses have separate compliance rules, as well, under IASB IFRS 16. The difference is important to note, as the international standard differs in materiality threshold from the U.S. standard.
The bottom line is, if you’re a private company in the United States following U.S. GAAP, it’s a good indication you’ll have to file under the new lease accounting standard in 2021.
Indicator #2 - Number of Leases
FASB ASC 842 is about leases. The reporting has changed significantly for moving these from the footnotes to the balance sheet.
The big question is: Just how many leases do you have to have in order for FASB ASC 842 to apply to your company?
This is where a lot of private companies get tripped up.
When you have just a handful of leases - compared to public companies with thousands - it’s tempting to think the rules don’t apply to you.
But that’s just not the case in this situation.
FASB ASC 842 affects any business that enters into a lease. Whether that’s 1 lease or 1,000 leases, it’s still included within the parameters.
Also, don’t think you won’t get penalized as hard as public companies because you have a small lease portfolio. Auditors are on the hunt for even the tiniest mistakes related to the new accounting standard no matter what company type or size.
Virtually all companies will need to consider the substantial effect of the new accounting standard on their ASC 842 compliance, policies, procedures, controls, and systems.
Indicator #3 - Long-Term Leases
Although lease count doesn’t have any effect on compliance, lease duration does.
The new lease accounting standard only applies to leases with a duration of over one year. Under ASC 842, the leases that are exempt from the capitalization requirement are short-term leases less than or equal to 12 months in length.
Since the release of the new standard, there’s been a lot of back-and-forth about what defines a lease under the new rules.
Under FASB ASC 842, a lease is defined as:
- An identified asset: The asset must be physically distinct or the lessee must receive substantially all of the capacity of the asset.
- An economic benefit: The lessee must receive substantially all of the economic benefit.
- Gives direct use of the asset: The lessee must have the right to direct the use of the asset. If that was predetermined, the lessee must have the right to operate the asset in their own way.
If any of your leases fall under this definition and are longer than one year, the new accounting standard applies to your company.
Indicator #4 - Lease Type
Lease type is perhaps one of the most important aspects of FASB ASC 842.
In the past, companies only had to report on real estate leases. This isn’t the case anymore. The new accounting standard now applies to equipment leases, vehicle leases, and embedded leases.
Embedded leases - service contracts that contain a lease asset - have presented the biggest headaches for implementation.
These types of leases can be found in transportation service agreements, information technology (IT) service contracts, and contract manufacturing arrangements, among others.
It’s the first time these leases have to be reported on the balance sheet. No one has ever had to locate them before, so organizations will have to form new processes and controls to do it efficiently and accurately.
You’ll also have to get your teams on the same page about the urgency and accuracy of gathering this data. Lease management has traditionally been the realm of the property team, while balance-sheet reporting is the responsibility of finance. With FASB ASC 842, these departments will have to collaborate closely.
Take heed from the lessons public companies have learned: Compliance is an interdepartmental effort.
Conclusion: No Time Like the Present
These indicators should cement the fact that the new lease accounting standard most likely applies to your private company.
And now that you know the truth, it’s time to take action.
Even though private companies have a little over a year to comply with FASB ASC 842, there are pressing reasons not to wait a day longer to get started.
One of these is the negative consequences waiting for you at the other end of non-compliance or partial compliance. The other is the surging capacity crunch about to hit the market.
AMTdirect is the leader in lease accounting software and compliance with the new accounting standard. Our team of experts has helped hundreds of companies implement FASB ASC 842 in the least amount of time, effort, and expense. We’d love to help you, too!
Schedule a demo to get started.