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AMTdirect Insights Blog

The Truth Behind FASB 842 Implementation No One's Talking About

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It's no shocker...

You know what the FASB ASC 842 lease accounting standard is.

After all, it's been out in the wild for some time now. Comprehensive articles have been written about it by experts in the financial field. And public companies have to implement it by January 1.

So of course you know what's required. Right?

If you're like the majority of public and private companies in the United States, the nitty gritty of FASB 842 is a bit of a mystery. 

With that in mind, we're putting our expertise to good use by revealing the truth behind the accounting standards change no one's talking about.

Look back financials... whaatt?

Look back financials are a big deal when it comes to the FASB 842 standard.

But... they can be confusing.

Here's the deal: The original ASC 842 standard required companies to produce two years of “look back” financials with the new standard applied.

This gave investors the ability to compare performance in the first reporting period (after the new standard) with past performance.

For public companies with a fiscal year beginning January 1, the new standard goes into effect on January 1, 2019.

On that date, those public companies will have to hand over comparative financials for 2017 AND 2018.

The problem is, many organizations didn't have the technology or process in place to report under the new standards at the beginning of 2017. And that meant completing the comparative financial statements was a huge pain in the you-know-what.

There's good news, though.

FASB provided relief from this by offering companies the option to SKIP the comparative reporting requirements. High five.

The alternative is to “recognize a cumulative-effect adjustment to the opening balance of retained earnings” at their adoption date rather than on Jan. 1, 2017.

The short version is that the look-back financials are no longer required.

 

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The impact on lessees

If you were worried about comparative reporting, the new transition option is a relief.

But it doesn't change the considerable burden created by the new standards.

Companies will still need to go through the arduous process of capturing 55 data elements for real estate and equipment leases. This information is vitally necessary for lease classification under the new guidelines.

And you'll need to consider your lease approval processes, policies, and controls for in-house and external resources involved in the lease lifecycle.

Compliance isn’t a one-time event.

Your team will need to understand how to integrate the new standards into your reporting.

The impact on investors

While you might think you're the only one having to deal with the after effects of the new FASB 842 mandate... you couldn't be farther from the truth.

Investors have a stake in the game, too.

You see, the goal of the new standards was to increase transparency and give investors a more accurate view of a company’s financial obligations.

The retrospective reporting method was initially included in ASC 842 in order to help investors discern the source and impacts of the changes in lease liabilities before the transition date.

Thanks to the changes in lookback reporting, most investors will no longer have the ability to look at ASC 840 and ASC 842 reports side by side.

They'll instead only see a jump in the lease assets and liabilities. There won't be context to understand whether the corporation changed its approach to leasing before the transition.

Investors have two choices:

  1. Make decisions without this important data
  2. Acquire the data and prepare the reports themselves

The first approach is faster... yet less accurate. The second approach is manual & time consuming... yet gives you the answers you're looking for.

 

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Conclusion: Understand the truth about FASB 842

While the new transition under FASB 852 is a significant burden lifted from leesees still not adequately prepared for implementation, it's less than welcome new for investors... they'll have less insight than ever before into how leasing impacts a company's financial health.

The lesson for both groups - in public and private companies alike - is to take it seriously.

If you think FASB 842 implementation is no big deal - or that you've got plenty of time to knock it out - you're dead wrong.

The truth is, not taking the time to understand exactly what the standards mean for your company and your investors is a fool's errand.

You're sure to fail... and the consequences are not pretty.

Time Is Not on Your Side

123 days.

That's how long the project plan for FASB 842 implementation will take you.

It's ride or die time for public companies. And private companies would do well to get busy with implementation now.

We can help with that ticking clock.

Our lease management software is designed to help you execute FASB 842 in the least amount of time, effort and expense.

Schedule a demo to see it now!

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Posted on 8/8/18 8:06 PM by Amber Bigler Newman in FASB, in Lease Accounting

Amber Bigler Newman

Written by Amber Bigler Newman