An ounce of prevention is worth a pound of cure.
That warning has stood the test of time for one reason: Because it’s true.
And public companies that have implemented FASB ASC 842 are wishing they had taken it to heart.
Prevention means taking as much time as possible to prepare for the worst case scenario. And although public companies that weren’t of this mindset suffered the consequences, private companies needing to implement the new lease accounting standards don’t have to.
In fact, private companies have been handed the incredible opportunity of more time to prepare, more time to take preventative measures, and more awareness about the repercussions they may face.
There are 5 main ways private companies can prepare now and trade a panicked rush to the finish line for a world-class FASB ASC 842 implementation plan.
#1 - A Complete Lease Population
If you can get a handle on your entire lease population, step one of the battle is won.
43 percent of companies said they have 1 - 200 leases and 29% have between 201 - 1,000 leases. That’s a large number, especially when you consider the new accounting standard requires you to report on not just real estate leases, as is traditional, but embedded leases and equipment leases, too.
A hurdle is going to be understanding the way you think about leases and what types of agreements contain leases.
Mike Handley, CPA & Senior Manager at CFGI says undoubtedly one of the most common challenges is embedded leases and what that entails. He recommends planning early and getting ahead of those challenges sooner rather than later. It’s become more of a focus of auditors given the impact to the balance sheet.
#2 - Company-Wide Cooperation
Another reason preparation is so important well before the FASB ASC 842 deadline is because it touches every part of a company.
The lease types involved require every department to juggle lease terms, financing, and renewals for warehouses, office equipment, supplies, furniture, and vehicles. It’s not an accounting-only project, so you’re going to need willing participation from stakeholders in every department.
Bye-bye silos, hello teamwork.
Setting expectations for other departments beyond finance is really key to success, says Joshua Reisz, Manager of Global Financial Reporting at Kennametal, Inc. Without the buy-in and cooperation of those groups, Kennametal wouldn’t have been able to make the progress it did in the short time it had for FASB ASC 842 implementation.
To get everyone on the same page, follow these steps:
- Identify a lease accounting and management team.
- Provide proper training for internal personnel.
- Determine if an outside consultant or software service provider is needed.
Your job isn’t done once this checklist is achieved.
If you want to prevent confusion and errors, make sure everyone involved understands the importance of getting it done right and the negative ramifications if it isn’t.
#3 - A FASB ASC 842 Implementation Project Plan
A project plan is like the foundation of a building. If you have a strong, well-built one, it can last forever. And if you don’t have one at all, you’ll crumble.
Patrick Dwyer, Technical Accounting Manager at Element Solutions, Inc. advises that it’s critical to be organized about implementation.
“When it came down to the timeline, we really laid out a deadline,” Patrick said. “We were able to stay on track by getting stakeholders on board early. That benefitted us a great deal for staying on time with our FASB ASC 842 implementation.”
Joshua Reisz attested Kennametal began its project plan - gathering information and understanding what was needed - well over a year before the implementation deadline. It set the tone for the entire project.
And Mike Handley recommends consulting all internal stakeholders for input about the project plan. Make sure you’re identifying what their needs are and what benefits they’d like to see. Sometimes those needs are different than the needs of the accounting team.
#4 - Understand Possible Business Impacts
Although many public companies knew FASB ASC 842 implementation would be new and difficult, a big surprise came after reporting was submitted.
There were impacts to financials no one saw coming: It can destroy your company even if you do it right.
The whole point of the new lease accounting standard is to present financial numbers in a different light - a clearer light, according to the FASB. If you make a tiny mistake in reporting, you’ll suffer the same fallout as a company that made a significant error.
But even if your reporting was spot on, there’s a potential ASC 842 will impact your business for the worse.
Filing a financial restatement is the most significant of these repercussions. Banks can also reconsider lending rates to your business, as well as the entire industry. Executives may lose their jobs and private companies can have due diligence go awry.
With extra time on their hands, private companies would do well to assess how FASB ASC 842 may impact their bottom lines, investments, and financial status.
#5 - Lease Accounting Software
Perhaps one of the most urgent tasks when it comes to FASB ASC 842 implementation is choosing a lease accounting software provider.
There will probably be a shortage of lease accounting software providers as private companies try - and fail - to use spreadsheets to accomplish this complex onboarding and reporting. The experts at Kennametal, Element Solutions, and CFGI all recommend turning to lease accounting software.
And they say to do it sooner rather than later.
Automating the entire process can help you with implementation and reporting in the least amount of time, effort and expense. It’s a no-brainer that will allow you to avoid the rush as you move closer to the implementation deadline.
Conclusion: A Fair Trade
There’s no doubt a stitch in time will save you big in the long run.
Take it from the public companies who bore the brunt and learned the hard lessons from the first round of implementation. Waiting to start implementation isn’t worth the pain you’ll face down the road rushing to complete it.
Starting preparations now will be the key to success.
And here at AMTdirect, we’ve got an abundance of free resources to help you do just that:
- Watch: The FASB ASC 842 Deadline Change and What It Means for You
- Read: The Complete Guide to FASB ASC 842 Implementation Challenges
- Take the Quiz: The Lease Accounting Compliance Risk Assessment
- Add it Up: The Lease Administration & Accounting ROI Calculator
If you have questions about any of these resources or about how to tackle FASB ASC 842 implementation, our team of lease accounting experts is happy to chat with you. With over 20 years of experience under our belts and hundreds of completed projects, we can help you execute the new lease accounting standards flawlessly.