The start of the new year means planning for what you need to accomplish in 2020. For accounting teams in private companies, there’s a big task on your plate this year: getting ready to comply with the new lease accounting standard, ASC 842.
Last July, private companies got a reprieve when the Federal Accounting Standards Board (FASB) made the decision to extend the deadline for compliance to January 2021. Chances are, that was welcome news since you were likely immersed in preparing for adopting the revenue recognition standard. Now that’s done, and you have less than 12 months to prepare for becoming compliant with ASC 842.
How are you going to utilize the upcoming year to become ready in time? Based on helping hundreds of public and private organizations through this process, you are going to need every bit of the months ahead. This process has repeatedly shown to take longer than companies expect, and the impact is much greater than originally anticipated.
That’s why we’ve put together a lease accounting guide for 2020. With these 5 steps, you can better plan your compliance project, establish a timeline for the year, and effectively accomplish your goals across the upcoming months as the deadline approaches.
This lease accounting guide is organized into 5 steps that encompass the major tasks and milestones required for ASC 842 compliance.
1. Schedule the months ahead.
With a complex project involving many stakeholders, it’s easy to get confused about what needs to be done – and when. Building a plan and a roadmap will guide you toward your goals.
In the early months of 2020, start by developing a plan that documents exactly what you need to accomplish, the resources you will need, and the timelines for meeting each milestone. It’s smart to set a deadline ahead of your final deadline, in case of unexpected delays or setbacks.
Part of developing that plan is making accounting decisions that will impact the scope of your effort. For example, what practical expedients do you plan to take? You’ll need to think through the pros and cons of saving time vs. the potential negative financial impact of electing certain expedients.
It’s critical to make these decisions early on, since your choices will impact the lease data points that your team will need to collect for every lease in your portfolio.
2. Determine who will be involved in the project.
This step does not need to take place subsequent of other steps. In fact, you may already have an idea of who to involve in your lease accounting project. If not, preparing for the lease accounting changes must involve additional stakeholders within your organization (along with your accounting team).
Any departments that may be responsible for leases within your lease portfolio, such as facilities, procurement, IT, and legal can help with gathering lease information. There will be users of any new technology you implement for tracking and reporting on lease data. And there will be whoever is responsible for changing their ongoing practices related to lease management in order to maintain compliance with the new lease accounting standard.
Many organizations will also benefit from involving an accounting advisory partner early in their compliance project, to help evaluate the potential impact to financial statements and make accounting decisions accordingly.
It’s smart to get your stakeholders involved from the outset, identify their roles and responsibilities with the project, and begin to work together on creating and implementing the remaining steps in your compliance project.
Learn more: FASB Lease Accounting Changes: How to Assemble Your Readiness Team
3. Conduct a lease inventory and compile data points.
The most time-consuming part of the process, you will want to get started on this as early as you can in 2020. Once you know what lease data you’ll need for lease accounting calculations, make an inventory of all your leases and extract the relevant data for each one.
You will need the help from the various teams who work with your organization’s leases. They can help find any lease documents that may be more difficult to find – whether they are tucked away in drawers, or existing in various spreadsheets and databases.
To do this step, you can also take advantage of lease abstraction services, which provides you with the added benefit of working with people who understand lease contracts.
No matter who is doing the work, having a streamlined process will make sure everyone knows what to do with the lease data as they collect it.
As you compile data from a variety of sources, you’ll need to reconcile lists, look for duplicates and investigate discrepancies. It will save a lot of time later if you make sure you’re working with data that’s complete and accurate BEFORE you begin the implementation of your lease accounting software.
IMPORTANT: According to the new standards, it’s not only the typical property and equipment leases that must be brought into the balance sheet. You must also examine all your contracts for embedded leases, or portions of contracts that meet the definition of a lease and must be reported on.
5 Tips for Smooth Lease Data Collection in Preparation for ASC 842
Embedded Leases Accounting: Do Your Contracts Contain Leases?
4. Implement lease accounting software.
Lease accounting software is a necessary part of successfully achieving compliance with ASC 842. The effort and the risks of managing all your lease data without it are simply too great.
The process and amount of time advised by lease accounting software providers for implementation may vary, but you will want to ensure you leave enough time for your organization to work with the provider you select, so your information is accurate and organized in a way that works for you.
This year, you should plan to begin implementation as soon as possible. It’s never too early to begin – and you will be very wise to not push this off until the very last minute, which could expose you to risking achieving compliance by the deadline.
A Deloitte poll from June 2019 found that only a quarter of public companies report that their lease accounting implementation projects are complete. Since the deadline for public companies passed in January of 2019, that indicates a lot of failures.
This is particularly concerning. At Visual Lease, we have not one failed implementation. Our dedicated team is committed to the success of your organization.
Working with a trusted implementation partner is a large part of achieving success and can make all the difference in meeting your deadline. However, you also need to be sure you are giving you and your partner enough time to work through the implementation.
5. Adjust policies and procedures.
Lease accounting compliance is not a one-and-done exercise, but a new way of working with leases that will impact your business for the long-term. Adopting ASC 842 is a big change to not only accounting. There will be a ripple effect that will require changes to many internal policies and operating procedures related to leased assets. For example:
- Leases can change during the course of a lease term. Variable payment amounts increase or decrease. Leases get renewed. Additional space is added to a lease contract. Specific underlying assets (such as computers or vehicles) may be removed from an umbrella contract. When these changes occur, the staff members involved with the change must alert the accounting team, because they will now impact your financial statements.
- Prior to ASC 842, few organizations had standards and controls around lease management and leasing decisions. Now leases have a much bigger impact on finances. So it’s important to put standards in place to ensure the best financial outcome for the company.
While you’re working toward gathering data and preparing to report under the new standards, take steps to create new practices and controls and train everyone involved, ideally before you go live with your new system.
Learn more: How and Why to Improve Lease Management Practices
The bottom line: don’t delay these crucial steps before the 2021 deadline. Everyday you delay starting your ASC 842 compliance effort, you’re increasing the chance that you won’t be ready in time to meet the deadline for reporting under the new standard.
There is only so much time you have this year. By following the steps above, you can be on your way to being prepared for implementation.
Need help? We’ve been through this process hundreds of times. We’re happy to talk through your questions.