FASB ASC 842 may not seem like a big deal.
After all, compliance has been pushed back and budget planning for the new year is pressing in. It would seem there’s no need to start implementing the new lease accounting standards just yet.
Unfortunately, this perspective is what put so many public companies in the dog house with their implementation timeline.
And while the deadline change brings good tidings to private companies on the surface, when FASB ASC 842 hits the floor in January of 2021, it could have devastating effects on companies that drag their feet on implementation.
#1 - A Deficit in Lease Accounting Software Providers
Public companies leaned heavily on lease accounting software to manage the entire FASB ASC 842 implementation process. In fact, a whopping 72% of companies either onboarded a new solution or upgraded an existing technology.
The scary part is, only 51% of private companies are planning to follow in their footsteps.
Private companies assume that because they have smaller lease portfolios, they don’t need an automated solution. Then when they begin to hit the roadblocks so many others have faced with implementation, they’ll turn to technology.
But it might be too late.
Truth is, there will be a queue of laggers who made this same mistake. You’ll join them to vie for the attention of available lease accounting software providers who’ll be busy onboarding private companies who started on time or helping public companies run year two reporting.
Start considering your software options now to get your foot in the door before the mad rush begins.
#2 - Major Business Setbacks
If you read the unfolding history of public companies’ implementation stories, you’ll better understand what may happen when the FASB ASC 842 deadline occurs for private companies.
Even for companies who submitted reporting on time and correctly, there were negative consequences from the new lease accounting standards. Since they represent a whole new approach to decades-old processes, it was challenging to get 100% accurate reporting.
And auditors are on the lookout for exactly that. Just one mistake - even as small as a typo - has sent companies into a slew of negative financial consequences, including:
- The need to file a financial restatement of prior years for like-to-like comparisons during a sale process (or a significant loan application)
- A significant decline in valuation because of this large restatement of financial health
- A deal going sideways during final due diligence
- Bank lending repercussions
- Financial executives being asked to step down
The governing bodies who passed the FASB ASC 842 mandate are serious about companies submitting error-free, exact reporting. They’re on the hunt for mistakes, and making one could cost your private company big.
#3 - Extraneous Spending
Before and after the FASB ASC 842 deadline, you can expect your bottom line to suffer. It all comes down to three main areas of extraneous spending: people, fees, and technology.
48% of public companies said their lease accounting implementation team was 5 - 7 people or more. And that doesn’t count the outsourced teams for documentation and data abstraction that many companies used.
Most companies are planning to use their in-house teams to manually collect the data needed for compliance, which means dishing out overtime pay across the span of the whole implementation time period is inevitable.
Since time is money, you’ll be spending a lot more of the latter to fuel the former.
Many companies were forced to hire consultants to help them understand FASB ASC 842 and how it affected their businesses. These consultants provide intrinsic value and expertise for strategically and efficiently approaching the new accounting standards. But they aren’t free.
You’ll also have to dish out money to pay auditors who specifically review your books for compliance. Depending on how large your lease portfolio is, if you’ve used spreadsheets vs. automation, and how well you’ve organized your reporting, this could heavily affect your spend.
Finally, there will be fees associated with any penalties levied against your company for non-compliance, mistakes in reporting, financial restatements, and legal representation.
Software is a can’t-do-without when it comes to compliance with the new accounting standards.
The benefits far outweigh the costs.
However, it is an extra expense you’ll have to budget for. Even if you use an existing solution, you’ll most likely have to upgrade to a newer version that’s been developed for the new accounting standards.
The thing to be wary of is the extra costs associated with waiting to choose a software vendor.
Providers will be forced to hike up costs and nickel-and-dime companies who make their teams rush through onboarding and implementation. With an already increased spend during the first year of implementation, you’ll want to avoid the extra fees due to procrastination.
Conclusion: Kick Off FASB ASC 842 Compliance Now
52% of private companies admit the deadline change has halted their plans to move forward with implementation of FASB ASC 842. With a minimum of 6 months recommended to budget for an implementation timeline, this doesn’t leave a lot of wiggle room.
Experts are predicting that private companies have underestimated the difficulty of executing the new accounting standards, similar to their peers on the public side.
It’s imperative to understand just what will happen once the FASB ASC 842 deadline takes effect next year, regardless of when you start.
And of course, the team at AMTdirect can answer any questions about lease accounting compliance and the new standard. We’ve helped hundreds of companies manage compliance with accuracy and timeliness.