New accounting standards under FASB ASC 842 and IFRS 16 require organizations to record leases on their balance sheets. We’ve helped public companies implement these standards, and now it’s time for private companies to follow suit before the newly revised Jan.1, 2022, deadline.
Crowe has helped many of our public company and early-adopting private clients adjust to these new guidelines. Here are 10 lessons that private companies will benefit from.
Our experiences with implementations, including both public and private companies, suggest the earlier a company starts implementation, the smoother and less costly the entire process is.
For private companies working toward the extended Jan. 1, 2022, deadline, it’s not too late to start working toward compliance.
Finding your leases is only the start. There are many other factors to consider and assess, including your incremental borrowing rate, embedded leases, software tools to assist in your calculation, and ongoing process and control changes.
The lease accounting standards require companies to record on their balance sheets leases embedded into contracts. As a private business or newly formed public company, this means determining how many assets your business owns and how many it leases.
Many companies underestimate the effort it takes to collect lease information and organize it in a uniform format. You might be surprised by the number of things you lease – from coffee makers and copy machines to building space and cars. The problem is that companies are not tracking smaller assets (like printers, for example) because the dollar amount isn’t as significant as other assets such as property. The value of a handful or more of smaller, seemingly insignificant items adds up, however. And tracking these and other leased items takes time.
Lease contracts aren’t one-size-fits-all. Contracts for car leases might be straightforward while land, equipment, and office leases can be rife with complexity. In order for software to formalize and standardize the requirements within these leases, companies need to have the right information, which involves going back and reviewing the terms of every lease, including possible balloon payments. We have found that many leases do not contain all of the relevant information needed to calculate your ASC 842 impact.
The new lease accounting standards add more requirements for your accounting team. This means budgeting for possible additional accounting staff members who can gather lease data and interact with other departments and branch offices. How far you stretch your budget depends on your organization. For example, if your company has 20 office leases and each is a 20-year lease, one accountant might suffice. But if you operate a business that has hundreds of leases and anticipate more leased assets, you’re probably going to have to bring on a lease clerk and maybe even another accountant. Remember, the lease accounting software you choose is an enabler, not an end-all solution.
Companies need to make sure their legal, purchasing, IT, real estate, and other departments are engaged with accounting during the transition process. This means accounting is going to have to ask each department, “What leases are you aware of that we don’t know about?” This outreach can help form a more comprehensive understanding of the company’s leases. Many companies now have siloed departments with individual databases and procedures. This disconnect can be a challenge, but a proper project plan, timeline, and team commitment can help the implementation and keep all departments involved on the same page.
The conversion to new lease accounting standards requires change for all departments and divisions involved. Departments such as IT likely are unaware of the standard change. It’s important for your accounting team to provide regular updates on new processes, controls, and requirements to ensure other departments are in the loop.
Many companies have approached the implementation of the new standards as a task rather than a project. Why? They didn’t realize the full depth of the process. You can avoid this same mistake by answering these questions ahead of your implementation efforts:
Once you have the answers to these questions, you can start to implement a new system. The accounting department can serve as the project sponsor and central point of contact as it leads the conversion effort.
Nearly every company finds some unexpected twists as they delve into implementation, such as embedded and hidden leases. The biggest surprise most companies deal with is the number of leases they have. For example, one client in the transportation industry who leases equipment believed it only had one lease for several hundred units. But in reality, it had several hundred leases because each piece of equipment needed to be tracked separately. Another company had verbal-agreement leases, which still had to be cataloged for the new standard. Additionally, knowing your service contracts and how they are delivered can ensure coverage over embedded leases.
The approach your organization adopts during your implementation process might have a significant impact on your balance sheet, so keep your auditors in the loop as much as possible. While auditors can’t give you management advice, you can share information on how your company will handle lease accounting going forward and the technology solution you choose. You can also allow your auditors to sit in on presentations or ask questions regarding lease accounting. The auditors will not only want the information, they will audit both your approach to implementation and ongoing coverage and control over the new lease standard.
Acclimating your company to the new lease accounting standards means choosing a software that streamlines data collection and can be easily embedded in existing company systems. Our lease accounting software, allows you to ease into the implementation process by: