Complicated. Serious risk. Arduous.
These words fill online treatises from financial powerhouses advising about FASB 842 compliance.
The experts agree... the entire implementation process for the new lease accounting standard is most emphatically easier said than done.
We’ve worked with clients over the past year to get ready for the new rules. And there’s no doubt getting starting sooner rather than later - whether you have a January 1st or a 2020 deadline - is your best bet for success.
In fact, we’ve discovered 6 points of failure that - if not handled properly - can be fatal to the on-time delivery of a final solution.
#1 - New Abstraction Requirements
If you think just because you have a lease management system, you’ll have a smooth transition… think again.
One of the most significant misconceptions when it comes to FASB 842 compliance has to do with software.
As we’ve gone through implementation, many customers made the early mistake of assuming because they had all their real estate data in an electronic system, they were all set for compliance.
Turns out, there are a couple of huge got-ya’s when it comes to data.
First, the new standard will require additional lease data that isn’t commonly abstracted today.
And beyond that, much of the information needed to correctly classify and calculate leases isn’t even in the lease itself.
For example, information such as fair market value and whether options are likely to be renewed is most likely not sitting in your lease admin system today.
You’re going to have to expend a significant amount of time and energy to find this important information for the new abstraction requirements.
It’s imperative you work this expenditure into your implementation timeline… or risk failure.
#2 - Equipment Leases
Where does your mind go first when you think about lease management? Probably real estate.
It’s not surprising… that’s where most of the balance sheet impact will come from.
But our clients have found most of the work will come from other types of leases such as equipment and software.
In fact, equipment leases are one of the most overlooked areas when it comes to FASB 842… yet potentially one of the biggest areas you could receive a slap on the wrist for.
The challenge is that often corporate finance teams handle real estate leasing.
But equipment leases are done on a department or field level. And that’s why the most common answer we get when we ask customers how many equipment leases they have is, “I have no idea.”
Equipment lease updates will take a considerable amount of team organization and communication, digging through contracts, and execution of other detailed work.
That’s why they’ll be a BIG consideration for most companies.
#3 - Cross Department Coordination
Let’s talk about your team...
One question we get a lot is, “Is FASB an accounting problem or a real estate one?”
The answer is, “Yes.”
Unfortunately, lots of companies have siloed organizations that don’t typically share information back and forth. Most of the time it’s because they just don’t have good systems in place for doing so.
It’s not impossible, though.
Our clients who’ve been successful have had to make shifts to roles and responsibilities.
But they’ve supported this transition by rolling out technology designed to make this cross-department coordination less painful and more efficient.
Getting your entire team on the same page - accounting, finance, IT, real estate, and lease administration resources - is no small feat.
Ignore it… and you could very well face failure.
#4 - Time
The fourth fatal implementation point is the one thing almost never on your side… time.
Most companies have seriously miscalculated the amount of time required to get ready for compliance. PwC’s recent survey showed 40% say it will take 9 months to complete.
In our experience, we believe it will take 6 months for implementation and testing, IF you’re prepared.
That’s a big if.
For public companies, that 6-9 months is long gone. For private companies, we advise you to learn from those public companies that didn’t act quickly enough… start implementation NOW.
The point... you need to allocate the resources and time, because the deadline is approaching faster than you think.
#5 - Financial Impact
Financial reporting under the FASB guidelines isn’t a one-time event.
What companies are realizing is they need to review their lease negotiation and approval practices in order to minimize the balance sheet impact.
The impact could affect your balance sheet metrics - the return on your assets, debt to equity ratios, taxation and bank covenants. Furthermore, the new rules may change the lease vs. buy decision.
And in some cases, it may make sense to renegotiate existing leases, such as leases that have service charges lumped in with base rent.
These present more of a challenge than leases that have the charges separated.
You’ll need to run the math in testing to understand the consequences.
Pro tip: This isn’t a suggestion. It’s an absolute must-do if you don’t want to fail at implementation.
#6 - Technology
You can have the people. You can have the processes. But without the right technology in place… you’re still going to fall flat.
Some vendors are pitching bolt-on FASB 842 calculation software. This technology sits between the lease administration system and the accounting system.
This seems like an easy solution but - compared to a lease administration solution with FASB 842 support built in - it actually introduces a significantly higher level of complexity.
Your decision about technology will boil down to the number of day-to-day lease events that will require revisions to the FASB schedules.
This could include:
- a change in term
- a change in space
- change in amount of a FASB-related charge after initial period
- receipt of TIA payments
This kind of stuff happens all the time.
And that makes syncing between disparate systems practically unmanageable.
The right technology will play a huge role in the success of your FASB 842 implementation… choose wisely.
Conclusion: FASB 842 Implementation Failure Isn’t a Choice
You can’t afford to fail FASB 842 compliance.
That’s right… don’t take these 6 fatal points of implementation failure seriously, and you’ll get slapped with lawsuits, fines, and a whole slew of money and time sucks.
It’s the price of not following the rules.
But it doesn’t have to be this way…
By taking the time and effort to understand the challenges of the new mandate - and committing to a complete execution of each item - your company can walk away unscathed.
FASB Implementation Doesn’t Have to Be So Hard
We know that implementing the new accounting standards rules can be… well, overwhelming.
Time is not on your side.
After all, preparation, transition, and testing - and the mistakes, delays and problems that go with it - just add to the time it takes to execute FASB 842 changes.
The good news… we can help. And it’s not a million dollar problem.
Our 20 years of experience in the industry has uniquely positioned us as experts on the FASB 842 leasing standards. We can help you execute your FASB timeline with the least amount of time, effort, and expense.
Find out today what FASB implementation is going to cost your organization in time and money… schedule a demo!