<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=760207761035115&amp;ev=PageView&amp;noscript=1">

AMTdirect Insights Blog

How FASB ASC 842 Mistakes Spell Disaster for Bank Lending to Private Companies

FASB ASC 842: Bank Lending Disasters

The increased transparency and comparability the FASB was going for with the new lease accounting standards may have backfired. As public companies discovered, transitioning away from routine leasing processes to ASC 842 has ushered in unforeseen nuances. 

These have spiraled into complexities that have severely - and in most cases, negatively - impacted the amount, timing, and uncertainty of cash flows.

In answer, FASB halted compliance deadlines on all of its major rulings, including ASC 842. 

But that doesn’t negate the fact that the impacts to companies who’ve already finished implementation are far reaching. It doesn’t leave private companies off the hook, either. With just a year to implement, the onus is even heavier to get the standards right. 

And when even the slightest mistakes in reporting for the new accounting standards can force auditors to make you file a financial restatement, your company can suffer the consequences in a variety of ways.

The biggest of these is making banks reconsider lending to you.

Because this one aspect alone could spell disaster for your company, we’re digging into what financial restatements are, their unforeseen negative effects on bank lending, and how to avoid them when implementing the new accounting standards.

 

Why Financial Restatements Matter

Technically, a financial restatement is a formal admission that a previously filed financial statement was inaccurate.

Translation: Oops, we messed up.

Understandably, this can raise doubts about a company’s accounting practices and internal controls. Questions about fraudulent activity arise, as well as the stability of a company as a whole.

And all of this can be a result of a simple typo or minor mistake. 

It can also stem from misapplication of complex accounting rules, which has been the case in recent months. One public company that filed a financial restatement stated it, “discovered internal control issues related to the accuracy and timing of the recognition of revenue.”

Another company that was forced to file a restatement said it cost $15.4 million total: investigation, audit, restatements, bank consents, and ongoing remediation.

All signs point to ASC 842 implementation confusion, mistakes, and sprints to the finish line due to procrastination.

The fact that so many companies have flubbed the new accounting standards can be seen in the uptick in financial restatements in 2019. It’s also apparent in the ripple effect these filings have had on the companies in question when it comes to bank lending.

 

ROI-Calculator-CTA_v2-1

Bank Lending Nightmares

There are a lot of bank lending complications when it comes to filing a financial restatement.

Once it’s submitted, the first thing banks will do is consider their lending practices to the company in question.

This means your company’s lending terms are likely to change (and not in a good way). Interest rates are more likely to spike and banks will watch your financials more closely.

If that wasn’t enough, lenders will review and compare peer restatements to decide on what your new interest rate should be. And that’s what a lot of companies don’t realize: This reassessment process affects your industry as a whole.

You see, even if your company hasn’t had to file a financial restatement, your lending terms will be impacted just because of the fact that you're in the same industry as a company who has had to file one.

This is why it’s so important to not only to use lease accounting software for accuracy and completeness, but to encourage your industry peers to use it, too.

Their success could literally mean your success.

And with bank lending forecasted to slow down in general and a cloudy economic climate ahead, private companies would be wise to do everything possible to avoid financial restatements.

 

How to Stay Out of Trouble

The lesson here is that you want to avoid filing a financial restatement at all costs. But that’s going to be difficult to pull off when factoring in the new accounting standards.

Alarming revelations are coming out about public companies and the lessons learned are eye-opening. 

  • Spend and timeline were double what most companies budgeted.
  • Stakeholders from each department are a must, but it’s no small feat to get everyone on board and on the same page.
  • You have to be 100% sure you’ve counted your full population of leases.
  • This requires an overhaul of all accounting processes and internal controls.
  • Spreadsheets and inexperienced vendors are pitfalls.

Despite these roadblocks to successful implementation and avoiding financial restatements, there have been handfuls of public companies who got it right.

These CFOs and controllers said the key to their success was being as thorough as possible and giving themselves a long headstart.

Part of that forward-thinking philosophy is giving yourself enough roadway to get lease accounting software up and running, as this can take a few months depending on how big your lease portfolio. 

It’s also being comfortable with the timeline to vet solutions and their service teams to find the right fit for your company. 

This was the first item on many public companies’ implementation checklists, and for good reason. Without software, you really can’t get accurate and timely reporting for compliance. Not using software also raises red flags with auditors because the manual alternatives can often be error-prone.

 

Conclusion: The Good(ish) News

Being on the bad side of a lender is never what you want. 

Private companies must heed the example of public companies who are facing financial restatement side effects. And they must wake up from the dream that the new accounting standards don’t apply to them.

It’s just not true.

Fact is, the rules apply to all private companies in the United States that have leases with a duration of over one year or more.

That means there are few companies the new lease accounting standards don’t apply to. 

Thankfully, there’s a way to avoid the trap so many others have fallen into. But in order to take advantage of it, you have to act quickly.

Lease accounting software is the answer. 

However, there aren’t many vendors on the market to choose from. With such a limited supply, and such a high demand - and an equally demanding timeline - you don’t have much wiggle room when it comes to getting started.

The longer you wait, the less likely you’ll get in the door with a software solution. And that could truly spell disaster for your company when it comes to bank lending.

Our recommendation? Get started today. 

Even if it’s just scheduling a walk-through of our solution, or creating a plan of attack, you’ll be one step ahead of the competition. And one step closer to ensuring your company’s ongoing success.

AMT_Demo_CTA

 

Posted on 10/28/19, 7:00 AM by Taft Tucker in Lease Accounting

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.