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AMTdirect Insights Blog

ASC 842 Adoption Date: Why Private Companies Shouldn't Wait

FASB ASC 842: The writing is on the wall for private companies who wait to start implementation.

The big news on the street is the delay by the FASB of the ASC 842 adoption date.

The governing body stated this deadline change will give companies more time to deal with the complexities of the transition. It will also give the FASB a chance to find out more about what went wrong for public companies. This includes digging into where there was unnecessary cost and where the standards can be improved.

A cheer went up for this extended deadline from companies just starting to look into lease accounting compliance and those in the beginning stages of implementation. After all, the delay gives laggers more time to create an adoption plan, staff adequately, and select lease accounting software. 

But it’s also created a huge blind spot when it comes to lease accounting technology.

It’s a problem that’s not talked about enough in the industry, but for those companies who wait to start implementation, the writing is on the wall.  

The Big Question

Before you can start to think about implementation of the new accounting standards, you have to understand whether or not it applies to your company.

The short answer is, it most likely does.

Most private companies are brushing off compliance with a no-big-deal attitude. Or even worse, a this-isn’t-my-problem attitude.

CFOs, controllers and other financial executives are under the false impression that the new lease accounting standards don’t apply to their companies. A lot of this misunderstanding stems from the fact that they have small lease portfolios.

The truth is actually the opposite.

Private companies in the United States that have leases with a duration of over 1 year must comply with the new accounting standards.

That means if you have 1 or 1,000 leases, you must be compliant with the new lease accounting standards by January 1, 2021. According to the Statistics of U.S. Businesses, there are 2.2 million companies in the United States that fall under this criteria.

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

And while 30% of private companies got this message loud and clear, 74% said they are unprepared to comply or only somewhat prepared.

It’s not a pretty picture. And it’s made worse by the unforeseen menace lurking around the corner.

 

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The Hidden Danger

The problems you can see are bad enough when it comes to lease accounting compliance.

A lot of the challenges have been aired in public: Excel spreadsheet failure, getting internal stakeholders on the same page, and wrapping your arms around the complete population of your leases (real estate, equipment, vehicles, and embedded).

Mike Stevenson from BDO said, "If we learned anything from working with public companies on their lease accounting implementation, it’s that we can’t underestimate this undertaking. Simply identifying and reclassifying current lease commitments — including embedded leases — is a substantial time commitment.”

The dangers we can see are certainly overwhelming. But there’s an even bigger one looming that no one’s talking about.

It’s the fierce competition private companies will face when choosing a lease accounting software in time for setup, training, and implementation.

When the FASB reconsidered the effective date for lease compliance, the top factors it cited for its decision were:

  1. Availability of resources
  2. Time required to educate staff
  3. Opportunity to learn from implementation issues described in large public company filings and SEC comment letters
  4. Application of difficult transition guidance
  5. Challenges in the development of IT system solutions, IT expertise, and effective business solutions and internal controls

Two out of the five reasons for delaying compliance (lack of resources and challenges in development) have to do with a gap in what boils down to - essentially - man-power.

There’s just not enough knowledgeable and capable people available to get the job done on time for everyone.

There’s a shocking lack of lease accounting software choices on the market today. In fact, there are only 20 options in the United States that are trusted by top companies.

Let’s say you wait six months down the road to get started on your FASB ASC 842 plan. You don’t have a large lease portfolio, so you think waiting is no big deal. However, what’s happened is that all the other private companies have taken the open spots in the lease accounting software world. 

These software companies have no choice but to leave you high and dry.

The bottom line is, you must choose a software now, or risk not having one at all.

Those who are at the back of the line gamble with not being compliant in time. Or they’ll have to do the calculations manually via Excel, which has proven to be unsuccessful.

The FASB has warned that software companies have not kept pace with developing features to match the new standards in enough time to support the deadlines. Although this is generally true, what most experts miss about vendors is significant: There’s just not enough to support the demand.

 

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Conclusion: Don’t Get Left Behind

There are a lot of reasons why you should care about FASB ASC 842 implementation.

The lessons learned from public companies have led to major miscalculations of the timeline needed to execute and hidden repercussions for even the smallest of errors in reporting.

“It's imperative that companies spend the time now to identify the right project management, staff involvement and technology to avoid any unforeseen issues as well as the increased costs of implementation caused by waiting until the last moment,” says Stevenson.

One of the biggest reasons to take heed is one a lot of industry experts didn’t even see coming: The severe shortage of software providers compared to the demand of private companies.

One of the most beneficial things you can do for your company is ignore the false sense of security brought on by the deadline change and start implementation now.

Taking action early will ensure you’re set up with the best lease accounting software.

At AMTdirect, we have over 20 years of experience perfecting our lease accounting software. Our compliance features are fully developed and tested, so you never have to worry about accurate reports. And our team of experts understands the nuances of the new lease accounting standards and how to execute them in the least amount of time, effort and expense. 

Talk to us today!

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Posted on 11/4/19, 7:00 AM by Taft Tucker in FASB

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.