You may have just breathed a huge sigh of relief.
The ball dropped at midnight ringing in 2020, giving private companies one more year to achieve FASB ASC 842 compliance.
To many, that sounds like adequate time to accomplish all the necessary steps to implement the new lease accounting standards, but several factors will crunch that one year into a time span barely sufficient to successfully meet the new deadline.
Fewer available vendors. With 52% of private companies admitting that the delay has pushed their timeline back, you’ll be one of thousands of businesses vying for services from a limited number of lease accounting specialists, software providers and auditors. Most of these experts have already been secured by the other 48%.
More complex than you think. Based on what public companies experienced during the implementation process, the adoption of FASB ASC 842 will be more complicated and time-consuming than you expect.
Added responsibilities. Even if you’ve budgeted for additional employees or a consultant, your staff will have to complete a myriad of additional tasks associated with implementation while maintaining their normal workload.
Starting your transition now puts you on track to meet the compliance deadline, helps you avoid the higher fees some providers will charge for taking you on as a client late in the game and reduces the stressful chaos that comes with further delay.
11+ Months to Deadline
Meet with key people in accounting and cross-functional stakeholders.
The goals of this initial meeting are threefold: to make sure there’s a full understanding of the technical requirements of the new lease accounting standards, to develop a budget for the project, and to assemble a transition team who will carry out the bulk of the tasks.
Depending on the size of your company, an ideal team will be comprised of representatives from Real Estate, Accounting, Facilities, Operations, Procurement, Legal, and IT. Once the transition team is in place, a detailed project timeline will guide them through the next phases which will be the most time and labor-intensive.
10-7 Months Out
Lease inventory, automated solutions and policy making.
During this part of the transition timeline, the interdepartmental team should tackle several major tasks, with some of the to-do’s overlapping and informing critical decisions down the line.
Compile a list of all leases.
Locating and identifying all operating and finance leases in your portfolio may not be as straightforward as it seems on the surface. Some leases may be paper documents stored in a filing cabinet while others are electronic records. Leases may be in different geographies and held by various business units.
Without a centralized repository for all leases, it’s easy to overlook some--and missing even one can mean your reporting is inaccurate--think fees and restatements.
Document all contracts with a simple survey sent to each of your company’s departments/locations to aid in creating a lease inventory. Ask for basic information about each vendor: name, start and end of contract, the value of the contract and the contact information necessary to locate the lease.
Next, you’ll cross-check the list for accuracy and completeness. Obtain a list of vendors from Purchasing or Procurement and compare it with a separate list from Accounts Payable. Merge the two into one list of vendors before comparing it with your newly created lease inventory.
Now you’re ready to examine the contracts to determine if they contain embedded leases. Keep in mind that in some service agreements, the word “lease” may not even appear.
Consider practical expedients.
Once your lease inventory is complete, decide which, if any, practical expedients you are going to elect. Be aware that three expedients must be selected as a package. And although the package can significantly reduce the time and effort needed to reevaluate decisions made under the old standards, there could be benefits from classifying leases differently under FASB ASC 842.
Collect data points.
Armed with the complete inventory and guided by the decision on practical expedients, determine the data points you need to capture from every lease in order to calculate ROU assets and lease liabilities.
There are more than 50 data points identified in the new lease accounting standards. In addition to payment information, you’ll need details that may not be included in the lease itself. Often commencement dates, options to purchase or renew, and termination clauses are in separate documents.
And the lease abstraction process won’t reveal other information like intention decisions, fair market value and useful life of assets.
Compare lease accounting software providers.
While waiting for the lease data to trickle in from all the various departments, the team can move ahead with evaluating vendors. If you have 10 or more leases--of any kind--it’s advised that you use an automated solution. Compare your shortlist of vendors by features, price and services.
FASB ASC 842 compliance calls for complex calculations. Lease accounting software accurately makes those calculations in addition to tracking, updating and managing leases to ensure that your reporting is accurate, both for initial compliance and in the long term.
Based on what you’ve learned about your internal needs from talking with lease stakeholders, your data gathering, and policies and procedures, make sure you choose a software provider who can deliver a solution for the unique complexities of your organization, whether that’s integrating with a legacy system or converting your data from spreadsheets.
Create policies and procedures.
The new lease accounting standards remove bright lines and replace rules-based guidance with a principles-based approach. As the team analyzes the data, they will have to make judgment calls about practical expedients, discount rates, materiality/capitalization thresholds and other aspects of compliance--and document how those decisions evolved.
Having your auditors engaged in the policy making process can save valuable resources as you prepare for implementation and beyond--Day Two reporting.
6-4 Months to Go
System integration and training.
After all the lease data is compiled and you’re certain of its integrity, you’re ready to transfer it into your new system. This is where the software supplier you’ve selected steps in to perform the normalization and migration.
Your team will still need to be involved, not only to locate data that’s missing, but for training on how to use the new technology as well as ongoing education regarding compliance and best practices essential to operational efficiency.
Depending on your provider’s support terms and your own team’s availability, you can expect implementation and integration to take 60 days or more.
3-0 months to 2021
Time for testing.
The end is in sight. With your data migrated and your staff trained, you’re in the final phase of FASB ASC 842 adoption--time for testing and making adjustments. If you’re in sync with this timeline you’ll have two cycles ready for your financial statements for the compliance deadline.
That cushion means you can report that your financials are complete and error-free with confidence. And next New Year’s Eve, you can celebrate without the shadow of FASB ASC 842 looming over you.
If you have questions about any phases of this suggested timeline, our team of lease accounting experts is happy to chat with you. With over 20 years of experience under our belts and hundreds of completed projects, we can help you execute the new lease accounting standards flawlessly.