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AMTdirect Insights Blog

FASB ASC 842: Why You Should Care

Learn the implications of ignorance when it comes to FASB ASC 842.

When it rains it pours.

Or so it seems when it comes to FASB ASC 842 and its IASB and GASB counterparts.

There seems to be a flood of issues from implementation of the new accounting standards. And most industry pros are pointing the finger at the extreme complexity of the rules.

Although there’s plenty of written guidance about ASC 842 in particular, it’s not nearly as thorough as it could be. For example, with ASC 606, the FASB held eight meetings over two years where 100 different questions or issues were discussed and documented in 60 different memos on the website. 

ASC 842 did not experience the same fervor of activity or documentation.

Add to that the nasty traps recent changes in tax rules have created, and it’s no surprise that companies have been facing devastating consequences.

The truth is, what many at first thought would be a simple accounting change has now turned into a sobering wake-up call. FASB ASC 842 demands big changes - with little direction from governing bodies - and the bare minimum in execution just won’t cut it.

 

Hidden Repercussions

You know you’re in trouble when the major players have an issue.

And that’s exactly what’s happening with implementation of the new accounting standards. In 2018, many sophisticated public companies struggled with understanding how to implement everything that was required. 

In fact, in a recent interview Kennametal, Inc. and Element Solutions, Inc. both admitted wrapping their arms around the complete population of leases, setting up software, and unifying their teams took much longer than they originally thought.

Public companies reported so many challenges with understanding FASB ASC 842 requirements, it inspired a deadline delay for private companies.

All of the hullabaloo tolls a warning for those who have yet to face implementation: You cannot afford to take a laissez faire attitude.

The handwriting is on the wall for those who do. Public companies who have endured the mire of implementation learned the hard way that the cost is too high when you take compliance lightly. 

While there are always calculated risks to consider in a business, take it from public companies - FASB ASC 842 implementation isn’t one of them.

 

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Lessons Learned

The #1 thing lease accounting compliance auditors will be looking for is accuracy and thoroughness. 

That means finding and including all lease types - real estate, equipment and embedded leases - across all locations. You must have a complete population of leases included in your final reporting.

Private companies have fallen down in this area the most.

That’s because they’re operating under the assumption that companies with small portfolios can survive these new lease accounting standards by doing things the way they’ve always been done, namely with spreadsheets.

Remember those sophisticated public companies we mentioned before? 

They didn’t consider using spreadsheets for even a moment. Because there are so many potential opportunities for error, and the complexity of FASB ASC 842 is so large in scale, spreadsheets were never an option. 

One small error - even a typo will do it - and an auditor will most likely be forced to slap you with a harsh penalty.

And this could lead you to have to file a financial restatement, joining the already swelling tide of companies who’ve had to do so. These can wreak havoc on an entire organization’s present and future. We’re talking market value falling, investors reconsidering, and even executives getting fired.

Opt for automation instead.

Automated reports - both basic and custom - come standard in lease accounting software. These will be lifesavers when it comes to the new lease accounting standards, as they are almost always error-free and much easier to manipulate than a manual spreadsheet.

You’ll get the accuracy and completeness you need for compliance while avoiding unnecessary spending on extra resources like money and man-hours. 

 

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Timeline Errors

One thing most companies are in the dark about is the timeline for implementation. 

While it can vary based on the size of your lease portfolio, the size of your team, and type of standard, the short of it is that the complex process is a major time-drainer. 

As Element Solutions & Kennametal can attest, it took 6-9 months to get their teams organized and wrap their arms around the complete population of their leases. 

This may come as a shock to private companies. 

Since ASC 842 was released, the industry has been estimating a 3-4 month timeline. But if you think you can implement the new accounting standards in this timeframe, you’re in for a shock.

You may be able to get most of the heavy lifting done in that timeframe if you’re well-organized. But as most companies have experienced, there have been a lot of roadblocks slowing down the process. 

Add to that the time for training and setting up ongoing controls, and the timetable easily stretches a few more months.

Even setting a goal to do it that quickly is a fool’s errand.

The more rushed you are, the greater the likelihood of mistakes - spreadsheets or software not withstanding.

There’s a reason why accounting firms and industry advisors are pushing their clients to start this process right away. The deadline is tight and the timeline is long.

Conclusion: Proceed with Care

The outlook is isn’t bright for companies who don’t prioritize the FASB ASC 842 implementation.

The stories emerging from 2018 implementation prove you must give 100% or be left facing the damaging results. And those who think the pushed deadline means implementation is going to be easy are living in a false reality.

It’s not hopeless, though.

Companies have come through the fire successfully by understanding:

  1. The challenges
  2. The timeline
  3. Their lease population
  4. Their internal stakeholders
  5. The value of software

The lease population might be the most important aspect of implementation. There are so many lease types, and auditors will be especially focused on completeness of lease population in reporting.

All in all, if you try and tackle it by yourself, compliance with the new lease accounting standards is complicated, time-consuming and painful, regardless of the number of leases you have.

But don’t fret! The good news is - no matter how big or small your lease portfolio, we can help you get ready for your lease compliance deadline and make it as easy as possible. We boast an expert team who’s already helped hundreds of public and private companies with FASB ASC 842.

We’d love to help you, too! Just reach out.

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Posted on 10/21/19, 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.