What Private Companies Can Learn from Public Companies’ Lease Accounting Transition

by George Azih

While lease accounting delay for private companies and nonprofits may have been celebrated, it’s a gift that could easily be squandered with inaction. 

It’s no secret that companies have recently had their plates full contending with a bevy of major accounting changes. From revenue recognition to current expected credit losses methodology (CECL) to lease accounting, overhauled rules mean compliance has been top of mind for financial executives. 

What has been a secret—or at least misunderstood—is just how complex the compliance journey can be. Changes to lease accounting rules, in particular, are moving billions of leases to the balance sheet, which requires an organizational exercise in change management, in addition to technical understanding. A recent survey of 200 accountants in the transition process revealed that their perception of the transition is far different from the reality. Just over one third of companies in the early stages of transition anticipate difficulty, while two thirds in the later stages have experienced difficulty. 

While the deadline has come and gone for public companies, these challenges are one reason why the FASB has recommended delaying the deadline for private companies and nonprofits by an additional year. While news of this delay may have been celebrated in conference rooms across the country, it’s a gift that could easily be squandered with inaction. 

That Escalated Quickly…

Public companies and early adopters report numerous challenges in the compliance process, from identifying and inventorying leases, to selecting the right software, to assembling the right team and gaining executive sponsorship. Their hindsight is 2020, and the most consistent feedback we hear is: “I wish I had started earlier.”

Lack of time is the second most common challenge experienced by transitioned companies. Many companies waited until the final quarter before the deadline to mobilize their efforts, which resulted in a rushed process and forced decisions. Now, even months after the deadline, just 54% of public companies are fully transitioned, and leases remain a sore spot for many. According to CB Insights, lease accounting was mentioned 621 times in Q2 earnings reports, up from 35 in Q2 2018.

Most companies will seek to adjust their process. In a recent Robert Half study, 95% of respondents said they plan to change their approach to lease accounting compliance in the future by adopting new systems. Private companies and nonprofits should carefully consider the challenges of the companies that came before them and ensure they use their extra time wisely to avoid the same hurdles.

Lease Team, Assemble!

With hundreds of pages of guidance to sort through, companies say that understanding the new standards is the most challenging aspect of the process. Once the transition has started, companies point to the following as the most-time consuming tasks:
  • Inventorying leases and all pertinent data
  • Evaluating and implementing software
  • Determining policies and practical expedient elections
  • Identifying embedded leases
  • Re-evaluating existing leases
Companies should begin building their lease accounting team, tools and processes now. The right team may include an executive sponsor, representatives from finance and accounting and operational leaders. Most companies with more than 15 leases are selecting lease accounting software to aid in their transition, a process that can involve kicking the tires of multiple options to ensure the solution is fully compliant, adaptable with your existing systems and avoids some of the common technical issues uncovered during the public company transition process. Then, identifying and inventorying leases should be an immediate priority to help your company understand its position and what must be transitioned. This may require a change in practice, as leases are often decentralized and signed or renewed without oversight. Embedded leases, in particular, can present challenges to accountants as they’re often somewhat hidden in service contracts and not easy to uncover.

Insights are Kind of a Big Deal

Compliance deadlines as a motivator for action are more stick than carrot. But the reality is, there is also enhanced business intelligence on the other side of the transition. In the process of readying your company for compliance and transition, you’ll increase data transparency and access to insights your organization didn’t have before. Companies in the later stages of transition report not only better lease management and administration, but increased efficiencies in their audit process and improved budgeting and forecasting capabilities. In short, you’ll be armed with more—and clearer—data to make better strategic decisions about leasing and operations across the board. We’ve seen companies uncover available cash on hand and lease terms they weren’t taking full advantage of. Any days or months you delay your compliance journey are days and months you’re missing out on potential business insights.

Heed the lessons learned of transitioned companies and use your extra time wisely.

George Azih is the founder and CEO of LeaseQuery