When the Financial Accounting Standards Board (FASB) officially delayed the effective date for the ASC 842 lease accounting standard until January 2021, many private companies breathed a sigh of relief. After having to adopt the new revenue standard ASC 606 last year, implementing another major accounting standard immediately after would have been incredibly demanding for accounting teams.
However, despite the one-year extension, private companies should not wait until the end of 2020 to start implementation work for ASC 842. If any lesson can be learned from public entities, who were required to implement ASC 842 by 2019, it’s that implementation often takes longer than expected. Below are five hurdles that may slow down your implementation timeline.
1. Finding Leases
Under ASC 842, most operating leases become balance sheet items, both as liabilities and assets, at a value based on the remaining minimum lease payment amounts. As a result, missing a lease agreement from the ASC 842 implementation can have a significant impact on a company’s balance sheet. Therefore, your accounting department will need to design a comprehensive process for gathering all relevant information, (e.g., up-to-date lease agreements) from different stakeholders across the organization, including field operations, legal, and IT.
2. Leases Embedded in Agreements
In certain instances, a business agreement that is not described as a lease agreement may have an embedded lease. Since ASC 842 requires recording nearly all leases in the balance sheet, missing an embedded lease from implementation can lead to a misstatement in a company’s financial statements. Companies must identify the types of contract categories that may potentially have embedded leases (e.g., certain service arrangements). Once the total number of contract categories are identified, each one should be reviewed, at least on a sample basis, to identify embedded leases.
If there are multiple arrangements entered at the same time, they may need to be analyzed as part of a single transaction. Depending your company’s operations, this analysis can require a considerable time commitment from your accounting department.
3. Finding a Software System
Depending on the volume of lease arrangements, most companies will need to implement a new lease software system to adopt ASC 842. Relying on spreadsheets for this process is time-consuming, cumbersome, and can lead to costly errors due to a lack of internal controls, audit trail, and data validation. Furthermore, many useful lease management tools provide features like administration alerts and data analysis, which simple spreadsheets cannot offer.
Since there are many software solutions on the market for lease accounting, your company will need to carefully evaluate the options to select an effective, comprehensive solution that is also reasonably priced. Keep in mind, the top software systems will be in higher demand as the ASC 842 effective date creeps closer, which can lead to extended implementation times.
4. Data Extraction and Migration
Once a proper lease accounting software solution is adopted and configured, all lease data will need to be migrated into the tool. Unfortunately, lease data that is necessary to adopt ASC 842 is usually not readily available in an easy-to-migrate format. In such circumstances, companies will have to review each individual lease agreement, some of which may be voluminous, to extract the relevant data.
During this process, it is important to identify any non-standard terms within the lease agreements that could have an impact on the ASC 842 adoption. Typically, real estate leases tend to require a significantly greater amount of effort in extracting relevant lease data from the agreements. Individuals with a sound understanding of ASC 842 are essential in executing this data extraction process.
5. Setting Up Internal Control Processes
The implementation of a new lease system will lead to many significant changes to the existing lease processes of a company. An increase in system-based procedures will likely replace the existing manual procedures, and more groups within the organization will need to become part of the lease process (e.g., accounting, legal, operations, accounts payable). As a result, new controls will need to be designed and implemented, even if a company is not required to be SOX compliant.
About Focal Point
Focal Point is highly experienced in assisting companies across a wide range of industries with implementing major accounting standards like ASC 842. By partnering with industry-leading lease software systems, Focal Point helps clients successfully implement leasing accounting programs that align with this new standard. If you have a question or would like more information, please don't hesitate to reach out to me at rserasinghe@focal-point.com.
