The new lease accounting standards affect all businesses – public and private, large and small.
ASC 842, the new lease accounting standard, creates a significant undertaking for organizations. Not only are lease agreements complex, but the calculations are, too.
To maintain accurate accounting and financial reporting, businesses must gather and manage all their leases continuously. Extracting lease data is an incredibly detailed effort, but it is critical to maintaining accurate information necessary to calculate the “right of use” assets and related lease liabilities.
Public companies (who have been adhering to the standard since 2019) have since learned that this process is extremely time-consuming and resource-intensive – not to mention, if done incorrectly, can put an organization’s financial reporting at risk.
For private companies, the deadline to comply with lease accounting standard ASC 842 is right around the corner beginning for reporting periods after December 15, 2021.
Because no company can afford to get this wrong, I’m going to share some information to help you achieve and maintain compliance with ASC 842 and unlock opportunities along the way.
Understand the current climate.
Before beginning your journey transitioning to the new lease accounting standard, it’s beneficial to first get a lay of the land and understand where your peers are in the process.
As such, we recently surveyed 500 senior accounting and finance professionals from private companies on the topic of ASC 842. Public companies were excluded from this analysis so that we could truly get an understanding of where private companies are on their journey toward compliance. What we found is that despite the looming deadline and significant business opportunity that comes with adopting ASC 842, 75% of (surveyed) companies are not yet fully compliant – and of that group, 46% are less than halfway through or have not yet begun the process.
Moreover, a shocking one in five respondents admits that achieving full compliance has been a low business priority. Compounding this is that two in five surveyed admit that the ASC 842 compliance process has taken more time than expected, which puts those who have not started the process at serious risk.
This is of particular concern considering the average anticipated staff hours to gather all the necessary lease information to fully adopt ASC 842 can exceed 1,300 hours, equivalent to nearly eight months of full-time labor for a highly skilled worker.
Conduct an assessment period.
Organizations have cited several reasons for their delay transitioning to ASC 842, including the pandemic, underestimating the complexity of the requirements, and not allocating the proper resources.
Of all the possible causes for delay, you should focus on those that you can effectively address. What exactly does this mean? Well, despite the pandemic being held out as a leading cause for companies not yet transitioning to ASC 842, it’s not something anyone could have anticipated. However, ensuring that you have the right resources in place is something you can address as you prepare for new lease accounting standards.
But, before you can identify the right people, resources and technology for your business, you should first take the time to evaluate your current lease accounting process. In doing so, you will likely uncover gaps that you can then address with your invested resources.
This step is a critical – and often overlooked – part of the journey toward maintaining lease accounting compliance.
Consider the full range of benefits associated with compliance done right.
In the same survey of senior finance and accounting professionals, all respondents recognized that complying with ASC 842 will offer their companies substantial benefits, including more transparent valuation of the organization (54%), cost savings (54%), easier preparation for audits (53%) and the ability to make strategic lease decisions (50%).
However, more than one in three senior finance and accounting professionals surveyed note that they don’t have the right people, technology and tools in place. High among the things they consider to be essential includes implementing new or upgrading existing lease accounting and management software.
To get the right resources, follow these four steps:
- Identify your project stakeholders and project lead to kickstart your entire process. Consider all internal and external teams that will need to be included, such as real estate, IT, Legal, and Accounting.
- Knowing that you’ll likely require technology to help manage your leases and streamline key processes, determine and approve a budget for a dedicated solution.
- Once you’ve identified the key players, collect and prep all leases across your portfolio for easy data collection.
- Work with your IT department to conduct a needs assessment for your new technology.
Collect on your investment today and in the future.
Reaching ASC 842 compliance in time for the standard’s effective date is only part of the battle. Ninety-nine percent of respondents expect to face ongoing challenges maintaining compliance after their initial adoption. Among the most anticipated challenges include accurately tracking and managing future modifications to leases.
With the right team, technology and support, you’ll be well-positioned to maintain compliance with ASC 842, adopt future lease accounting standards and recognize gaps and opportunities within your lease portfolio.
Joe Fitzgerald is Senior Vice President of Lease Management Strategy at Visual Lease.