For private companies just beginning to think about adopting the new lease accounting standards, it may seem like you’ve got plenty of time. The lease accounting compliance deadline for a calendar-year private company is January 1, 2020. FASB ASC 842 takes effect for fiscal years (and interim periods) starting after December 15, 2019.
That might seem very far away right now. Let me assure you that it’s not! Based on our experience going through the compliance process with hundreds of public companies over the past two years, the best advice we can give private organizations is to start on your lease accounting compliance project NOW rather than later.
Lease accounting compliance deadline: waiting too long will cost you
There’s a limited pool of talent and resources available to help organizations gather data, abstract lease contracts, and handle systems integration. It’s a question of supply and demand: as the lease accounting compliance deadline approaches, the cost to obtain those services can rise significantly.
Also, if you wait too long and end up cutting corners by skipping over the planning stages, that can come back to bite you in both re-work and extra expense later. For example, we’ve seen companies jump in and collect lease data before they have considered their practical expedients and how that impacts the data needed and how it must be broken out. The result? They had to scrap their first set of data and pay to do it twice.
Why you need more time than you think
Gathering your lease data requires a massive effort.
In the beginning, many companies underestimate the time and resources that will be needed to find, collect, and aggregate lease data. If your data is decentralized, the effort will be even greater. Think about your own internal resources. How much time will they have to devote to this effort on top of their other responsibilities? I can tell you this: even if you start now, dedicating an hour a day won’t get it done.
Here’s an example to illustrate my point. Let’s say you have 400 real estate leases where you’ve negotiated lump sum rent payments for the sake of simplicity. That might have been a great strategy until now. However, as you prepare for lease accounting compliance, it may turn out that you need to break down gross rent payments into lease and non-lease components. How will you do that? You may need to ask landlords for copies of their invoices. You may need to seek out the advice of real estate brokers. Now imagine doing that 400 times for each of your property leases. Now you should begin to understand why this exercise takes a long time.
It’s smart to build in time for the unexpected.
The lease accounting compliance effort is a complex project and unexpected things inevitably cause delays. As I mentioned, decentralized organizations are the most at risk. When lease information has never been collected in one database, companies often have no idea how far out to cast the net to find all their lease contracts. Here’s what ends up happening: invoices for a recurring payments turn up that weren’t accounted for in the calculations. If that happens late in the process, it can cause a lot of re-work and significantly delay your project.
Tips for getting started on your lease accounting compliance project
Engage reputable resources now.
As I mentioned, there’s a limited pool of vendors and consultants with the expertise to help you pull together and abstract lease data. In 2018, resources were tight handling the public companies racing to achieve compliance by Jan 2019. This year, four to five times as many private companies will be trying to engage those same resources before the upcoming lease accounting compliance deadline of January 2020.
If you have limited internal resources and a lot of leases, it’s in your best interest to engage the help you need right now. And, be sure to invest the time to properly evaluate those services. Get samples of lease abstracts to check for the quality you need. The old saying “garbage in, garbage out” should guide your due diligence efforts. Poor data will ultimately lead to inaccurate financial reporting.
Decide on practical expedients.
The practical expedients you decide to take for your financial reporting have a big impact on the way your data needs to be collected, broken out, and organized. If you collect data without making these decisions, you may have to backtrack and start all over again. Or in the best case, delay your project while you manually rework your lease data.
Divide and conquer.
Many companies struggle with which task to do first: collecting lease data or choosing a lease accounting system. It’s a tough question, because it’s kind of a chicken-and-egg situation. You need to understand your data to choose a system, and you need the system to know how to organize the data.
In our experience, the most efficient way is to do both simultaneously. Gather your lease accounting compliance committee and create two teams: one to spearhead the data collection effort, and one to evaluate lease accounting technology. Have your teams regularly touch base to report on progress, compare notes, and share helpful information.