A palpable sigh of relief went through the accounting world last week.
As of July 17th, the Financial Accounting Standards Board (FASB) voted to extend the deadline for its ASC 842 compliance.
Private companies get another year on the clock for ASC 842 compliance.
This move by the governing board to transition the deadline to January 1, 2021 presents some serious questions. After all, public companies didn’t receive this generous offer. Their compliance deadline remained set in stone for the beginning of 2019.
So why did the FASB decide to initiate this roll back? It’s a tricky question fraught with complications and complexity, much like the new lease accounting standard itself.
On the surface, it makes sense why private companies are welcoming this update to the schedule. There’s a pile of challenges even the most fearless accountant wouldn’t want to tackle.
But dig deeper into the effects of the decision, and you might question if it was a good idea after all.
#1 - Times, They Are A Changin’
Change doesn’t come easy in the best of circumstances to the most prepared people.
And as you probably know, neither of those things is true when it comes to the situation with private companies and the new lease accounting changes.
“Nothing is so painful to the human mind as a great and sudden change,” said the insightful novelist Mary Shelley.
This is true of all humans to an extent. But accountants will tell you forthrightly they’re creatures of habit. And changing patterns, behaviors and processes hits them especially hard.
We don’t have to tell you just how major the changes are: Most leases have gone in the footnotes and now belong on the balance sheet.
It’s a whole new way of thinking about lease accounting and lease administration - an abrupt 180 from the norm.
This in itself presents a severe hiccup the FASB considered when re-assigning the new deadline.
#2 - The Struggle Is Real
If you have a positive outlook about getting through the ASC 842 implementation, you’re pretty much the only one.
The experts sure don’t, and for good reason. There’s a laundry list of struggles.
All are very real, all have been faced by public companies:
- Sometimes it’s apparent what a lease is. Sometimes it’s not. You have to figure it out.
- Everyone across the organization has their hands on leases. You’ve got to coordinate with all your departments to make this work.
- Amendments, foreign languages and right-of-use verbiage makes parsing lease data a headache.
That’s just the first small hill on your way up the implementation mountain you’re facing as a private company. There are a veritable ocean of other issues, most of which you’ve either heard about already or have experienced yourself.
The FASB knows these struggles all too well.
And that’s another reason it decided to push the new lease accounting standards deadline out to 2021.
#3 - Just Ask
It doesn’t hurt to ask. And that’s exactly what The American Institute of CPAs (AICPA) did.
The organization formally went to the FASB to ask for a push back on the effective date, saying lease accounting is “significant and complex.”
Essentially, they’re freaked out.
They saw public companies with veritable fleets of accountants on the struggle bus, and they know it’s going to be worse for private companies with much smaller teams.
And although private companies are smaller in man power than public companies, they’re still big enough to have multiple departments - and office locations - that need to be involved in the compliance execution process.
Talk about overwhelming.
Clearly, the FASB must have listened to the pleas from the AICPA. It precipitated action not long after.
#4 - Fail: Lease Administration Software
It’s the 21st century. Automation, technology and AI are standard.
So it’s no wonder public and private companies turned to lease administration software to implement the new lease accounting standards. Cloud-based software solutions promise speed, accuracy, and cost-effectiveness.
The only thing is...many of them couldn’t deliver.
The problems include errors and timeouts in the software when trying to complete functions and run reports. Most concerning is the fact that most of the compliance features are dead off.
It’s understandable that a fully compliant lease administration software would take months to implement and cost a pretty penny. All of the industry experts have warned this would be the case since the standards went live.
But accuracy is the #1 item on everyone’s list, and failing it is just not an option.
At AMTdirect, we don’t feed our customers faulty timelines or prices. We pride ourselves on telling it like it is. And that’s why when we say we’ve been building out our compliance solution ever since the hint of ASC 842 was in the air, we’re telling the truth.
Fortunately, the FASB concluded what most of us know to be true: Many of these so-called lease accounting vendors built their “compliance solution” as an add on. Some of them don’t even have experience in the lease administration space. And most don’t even understand what the new lease accounting standards require.
All of that surely helped the FASB decide to extend the deadline for private companies.
#5 - Tapped Out
Private companies are tired.
What we’ve seen and heard over the past year is that private companies are trying to make the new lease accounting standards work with existing process and people.
So, they’re doing it manually. Think spreadsheets and spreading teams thin.
And they’re finding out right about now - the time when implementation should be complete if not just about to be - that doing it themselves just isn’t going to cut it.
Maybe you’re in this boat yourself. It’s not a comfortable place to be.
But now it’s too late.
Software companies are inundated with huge implementation projects for companies who had the foresight to jump on the bandwagon early. The late-comers will have to rush, pay a lot of money, and still probably miss the deadline.
The FASB could sense the panic. They moved the deadline and avoided stampeding the industry with fines next year.
Conclusion: To Wait or Not to Wait?
The FASB understands the challenges private companies face.
It’s a huge undertaking. In fact, CFO Magazine says it could bring up to $2 trillion of lease liabilities onto S&P 500 balance sheets.
Although it’s a giant change up front, its permanence will engender better business practices over time. The FASB wants this new lease standard to be a success. And it’s been flexible and willing to work with private companies.
But there’s a secret fear.
Will private companies use the extra time to begin compliance now or will this pushed deadline only feed the procrastinator attitude?
In a 2019 survey, Deloitte found only 30% of private companies planned to adopt ASC 842 on schedule, 33% said they were unprepared to comply, and 44% said they were just somewhat prepared.
Private companies have a choice. Sit on your laurels for another year or hustle to get implementation done as soon as possible.
This deadline push isn’t a one-and-done kind of thing. It will have repercussions on the decisions the FASB makes for years to come. They’ll increase their leniency in favor of the fast action of private companies.
Or they’ll barr deadline changes altogether in light of inaction.
If you’re one of the private companies who’s on the side of taking immediate action, you should start evaluating lease accounting solutions immediately.
Our team has helped hundreds of public and private companies across multiple industries implement the new lease accounting standards and organize new processes for their organizations.
We can help you, too. Just reach out to schedule a demo.