Private companies - the FASB is lookin’ at you!
With the new FASB standards in place for public companies as of earlier this year, the FASB is turning its attention to private companies, whose implementation deadline starts in January 2020—less than eight months away.
Surveys show private companies are reporting an even lower state of readiness than public companies were at this time last year. Almost 40 percent of private companies are behind schedule on implementing the new lease accounting standards.
Some haven’t even started getting ready yet, even though the implementation deadline for FASB ASC 842 compliance is quickly approaching.
Even under the best of circumstances—your team is on the same page, you know where all your leases are, and you have invested in the best software for your needs—FASB 842 compliance isn’t easy.
Nearly 55% of companies who have already started this process are finding FASB 842 compliance more complex than originally anticipated.
Here are 7 questions you may be asking, and the practical answers for tackling the new lease accounting standards.
Q: What’s the biggest hurdle for FASB 842 compliance?
A: Collecting & organizing your data.
It’s no surprise the planning and assessing phase takes up the majority of the lease accounting project. You’ve got to really get into the nitty gritty of things to find and notate every single lease contract your company’s involved in.
Then you’ll have to identify how each of those leases are treated under FASB 842.
Unfortunately, the information in your current spreadsheets is probably not nearly detailed enough to include all of the elements needed for FASB 842 compliance. In order to obtain this data, you’ll need to abstract as many as 30 different data elements from each of your company’s leases.
The tricky part is, some of these elements may not already exist in your current software or spreadsheet.
Even if your real estate spreadsheets are detailed and manageable, there’s a good chance you have hidden leases that haven’t been taken into account.
These leases, such as IT, fleet, plant, machinery, and equipment leases, have been labeled the most challenging to analyze by the average 40% of companies who’ve said they have taken an inventory of their enterprise-wide lease portfolio thus far.
This is why it’s important to start now.
If you haven’t already, go ahead and begin searching for and collecting all of these leases so they can be compiled, analyzed, and organized in plenty of time before the FASB 842 implementation deadline hits.
Q: What team members need to be involved?
A: Real estate and finance teams need to work hand in hand. Don’t create silos.
It’s so very important everyone works together to tackle this significant and immense project. Collecting, organizing, analyzing, and implementing leasing data changes is no easy task.
So it’s going to take all hands on deck.
The new lease accounting standards also require information and management from both finance AND corporate real estate departments.
Accounting departments are responsible for producing the balance sheet and other financial documents. While the corporate real estate team will be handling the details of each lease in order to achieve capitalization.
This project is also going to require oversight and management to ensure successful implementation. Over 60 percent of private companies have formally assigned a project manager from the accounting or financial reporting team to lead the project.
Furthermore, preparation for the new standards and the ongoing creation of new lease contracts MUST be a cooperative effort between teams.
Q: How can we get the most out of implementation for our entire lease accounting initiatives?
A: Good news! There are several ways to benefit from the new lease accounting standards.
As public companies begin to see just how beneficial the newly implemented standards can be, private companies should take note and learn from their challenges and successes.
First, the new standard impacts the negotiation of new leases and renewals.
This means you will have some wiggle room to frame your lease terms at a more favorable time for financial reporting purposes. You might even want to renegotiate some of your current leases in order to maximize the financial reporting benefits.
This may require changes to standard documents and approval processes.
Even if you have to update your current business practices, the processes required to accommodate FASB ASC 842 also have the potential to reap unexpected advantages.
Well-documented information, a solid organizational system, and more controls in place can can help enable better tracking and asset management, avoid redundancies, and enable the negotiation of better lease terms throughout the organization.
It’s really a win-win situation.
Q: What’s the #1 thing companies can do to get this right?
A: Choose the right software.
Up until this point, few companies have selected their lease accounting software. According to Accounting Today, only 20% of companies have officially selected a software vendor to support their lease accounting needs under the new FASB 842 standards.
Even though it’s inadvisable, more than 50% are planning to still use only spreadsheets.
But in order to ensure successful organization and implementation of the new lease accounting standards, with efficiency and longevity, we suggest locating and utilizing the best software for your needs.
Providers of lease administration software and lease abstraction services are likely experiencing a spike in demand as everyone is preparing for FASB 842 compliance. As the deadline draws closer, private companies will flock to them.
Acting now to secure your place in line will make sure you have access to the tools & resources you need.
Q: When do I need to start presenting numbers compliant with FASB ASC 842?
A: Private companies have a deadline of Q1 2020.
But even though the lease accounting implementation deadline doesn’t hit until the end of this year, you only have 8 months to get all of your information organized and running on a new software.
Our suggestion? Don’t put it off any longer—start today.
Q: How do I get started on this seemingly overwhelming task?
A: Start with a plan.
No project, especially an incredibly tedious and manual one such as this, can be successfully implemented without a solid plan in place.
Check out these resources to help you make a plan, organize your team, and get ready for full FASB 842 compliance:
- The FASB 842 Equipment Lease Checklist
- The Real FASB 842 Timeline Calculator
- 12 Steps for Handling your Equipment Leases Under the New Lease Accounting Standards
Q: How do the new accounting standards affect my lease accounting team?
A: Unfortunately, your team will be anxious about losing control over the lease accounting process.
The answer may not be what you want to hear.
However, the intent of FASB 842 is the opposite. The goal of the new accounting standard is to pave the way for more accurate reporting of leases in the long run.
As you try to wrap your head around these long-term changes to the lease administration process - and explain them to clients and investors - keep your focus on the big picture, instead of just the top-of-mind implementation process.
As you re-organize your team and create new processes for this accounting change, think about how you can optimize for compliance not just to meet the 2020 deadline, but in all future reporting periods.
You’ll keep the changes to a minimum and create smoother business processes for your entire organization.
Conclusion: FASB ASC 842 is here to stay
Whether we like it or not, FASB ASC 842 is the new standard for lease administration.
Addressing these critical questions means not just successful compliance, but ongoing efficiency when it comes to your lease accounting processes. These new lease accounting standards may even produce beneficial outcomes for your team and business as a whole!
But the key is to start today. If you haven’t already set up a plan, start there.
And wherever you are in your process, take advantage of our helpful resources: The Quick Guide to the New Accounting Standard and The 2019 Complete Guide to FASB 842 Implementation Challenges.
We’re here to help you succeed.