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ASC 842 Changes: Death by Financial Restatement


The debate over the new FASB lease accounting standards is heating up.

A slew of complaints have been popping up in the last quarter of 2019 including one senator who’s introducing a bill to require the FASB to study new petitions in the future.

Controversy or not, one thing remains clear: No matter your lease number and no matter your company size or type, compliance with the new FASB ASC 842 changes isn’t optional.

And it’s not going to be easy.

In fact, there’s been an eyebrow-raising number of financial restatements filed in the past year. And most of them are related to the complexity of the FASB, GASB and IASB standards.  

This raises a major red flag for private companies.

In fact, the stats and stories point to the fact that financial restatements caused by the new accounting standards could be a nightmare.

Negative Impacts of Financial Restatements

A financial restatement is technically a formal admission that previously filed financial statements were inaccurate.

This raises a lot of questions - and they’re not good ones.

First, your company will take a hit when it comes to valuation. Market value automatically goes down when you refile. Even if it’s just because of a simple mistake, the market is wary of restatements and tends to err on the side of caution.

This creates a ripple effect.

Your company will receive a lower credit rating. Once the banks see this and review your loans, it almost always spells out a negative impact on the terms of your lending.

The heaviest hit can come to the people who are ultimately responsible for the new accounting standards and the company financials overall. Reports are circulating that CFOs and CEOs have been terminated by boards in the case of financial restatements being refiled.

All of these effects snowball into the ultimate nail in the coffin: Loss of investor confidence. 

Simply consider the tragic rise and fall of the WeWork IPO. Due to the complexity of the new lease accounting standard, what once was a promising enterprise has now turned to dust.

There’s no doubt a financial statement can do serious harm to a private company looking to sell in the near-term. This is especially true in light of the new lease accounting standards and underscores the importance of giving it your full attention.




The Myth About Lease Counts

One of the driving factors in the growth of financial restatements is the relative ambivalence from private companies when it comes to the new lease accounting standards.

And one of the myths propelling this wayward attitude is that implementation won’t be as complex for companies with small lease portfolios. 

Companies are learning the hard way how wrong this is.

10 leases, 5,000 leases, or anywhere in between… no matter your lease count, you’re required to implement the new lease accounting standards. 

And whether or not you have the numbers to support it - in team members or time - achieving compliance is going to be a beast if you try and tackle it alone. The complexity large public companies suffered through applies just as much to small private companies with just a handful of leases.

If you think the new lease accounting standards don’t apply to your company, there’s a good chance you’re wrong. 

Implementation has been a thorn in the side of the companies who’ve completed it. It’s taken more time, more money and more people than anyone originally imagined, including the FASB.

In fact, the governing organization officially delayed the deadline for private companies to comply because of the tidal wave of challenges.


The Implementation Hurdles

No matter the number of leases - whether a handful or thousands - you’re going to face implementation challenges.

The first hurdle you’ll face is gaps in your data.

And when auditors are focused on seeing a complete population of leases, it would be wise to prioritize solving for this issue. That means getting your arms around every single one of your real estate leases, equipment leases and even embedded leases.

Public companies were laser-focused on getting the math perfect to avoid a financial restatement when they filed in early 2019. 

Element Solutions, Inc. and Kennametal, Inc. both confirmed being as thorough as possible was the focus of their implementations. They admitted it wasn’t easy, though. And it took a lot longer than they thought.

Kennametal dedicated four months to implementation, not counting the time it took to evaluate vendors for compliant lease accounting software. Element Solutions said it took nine months from start to finish.

Both companies also emphasized the importance of using software.

Choosing the right vendor is the difference between accurate, error-free reporting and filing a potentially devastating financial restatement. And they both stated definitively that spreadsheets would only ensure you get hand-slapped by auditors, with a restatement most likely to follow.




Conclusion: Heed the Warnings

Financially sophisticated companies like Kennametal and Element Solutions put a lot of energy into addressing the complexity of the new accounting standards and getting their entire organizations on the same page about it.

This should send an unmistakable warning message to private companies.

When organizations with large staff counts and - typically - larger budgets are exhaustively meticulous about the new accounting standard, smaller companies should be even more so.

There’s a greater chance of mistakes, and thus a greater chance for a financial restatement.

The new accounting standards are not something to take lightly. Private or public, large or small portfolio, every company with leases is impacted. 

Avoiding financial restatement is a matter of following these steps for implementation:

  1. Start as soon as possible.
  2. Get a complete lease population.
  3. Get internal stakeholders on the same page.
  4. Vet & onboard a software solution.
  5. Make sure reports are accurate.

This 5-step list is a lot simpler said than done. And there are a myriad of sub-steps under each of these that have to be meticulously executed. 

But breaking down the entire process into bite-sized chunks ensure you’re not overwhelmed by the project and you execute each part of implementation with the utmost care and detail.

And the great news is...we’ve helped hundreds of companies get compliant with the new lease accounting standards. If you have questions, or would like help getting started, schedule a free consultation with our team today. We’d love to help you too!



Posted on 10/14/19 7:00 AM by Taft Tucker in FASB, in Lease Accounting, in GASB

Taft Tucker

Written by Taft Tucker

Taft is the Chief Customer Officer at AMTdirect and is a resident expert about lease administration and accounting. Taft's passion is to share practical, helpful information about our industry.

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