Learn how to keep your ASC 842 implementation running smoothly.
When it comes to Accounting Standards Codification (ASC) 842, “Leases,” there’s a lot more to consider than just technical accounting. At the 2022 TXBizCon event, Crowe advisory partner Kevin Stewart spoke on what you need to know about implementing ASC 842 and how to avoid common pitfalls. Here are the highlights.
Pitfall 1: Delaying getting started
Experience has shown that the earlier a company starts an integration, the smoother and less costly the entire process will be. If you’re behind in your implementation efforts, consider focusing your efforts on incremental borrowing rates, embedded leases, software tools to assist in your calculation, and ongoing process and control changes.
Takeaway: Start now.
Pitfall 2: Having incomplete lease population information
Lease accounting standards require companies to record on their balance sheets leases that are 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, including immaterial assets like coffee makers, printers, and cars, among others. Many companies underestimate the effort it takes to collect lease information and organize it into a uniform format.
Takeaway: Lease contracts are everywhere in your business – and in more places than you think.
Pitfall 3: Underestimating complexity
Lease contracts aren’t one-size-fits-all. Some are simpler than others. Car leases, for example, might be straightforward. But land, equipment, and office leases can be full of unexpected complexity. When it is time for an audit, companies need to have the right information, which involves carefully reviewing the terms of every lease, including amendments. The relevant terms needed to calculate your ASC 842 impact can reside across multiple documents, and tracking changes across several amendments can be difficult. It’s better to know what information you need to keep in your records from the beginning.
Takeaway: Complexity abounds. Stay organized.
Pitfall 4: Underestimating impact on systems and accounting team
The new lease accounting standards will add more requirements for your accounting team, so it’s important to allocate resources appropriately. Consider budgeting for additional accounting staff to gather lease data and interact with other departments and branch offices.
The budget will be determined by your organization’s needs. For example, a company with 20 office leases with similar terms might need only one accountant. But a business with hundreds of leases or more likely needs more resources. It’s important to recognize support needs for budgeting reasons, but also to know not to rely too heavily on your lease accounting software. It’s a tool, not an all-encompassing solution.
Takeaway: Budget for appropriate accounting support.
Pitfall 5: Working on silos
Many companies have siloed departments with individual databases and procedures. But because ASC 842 affects more than just the accounting department, it's important to engage other parts of the business in the process. Departments to engage with the ASC 842 integration process include legal, purchasing, IT, real estate, and any other areas that might need to be involved in managing an existing lease. The standard question to ask each department is, “What leases are you aware of that we don’t know about?”
Takeaway: Involve other departments.
Pitfall 6: Failing to communicate with other departments
An ASC 842 conversion will affect corners of the business you might not have expected. Make sure you give a heads-up to all the departments in your organization, and if the integration involves a change for a department, keep them in the loop during the process.
Takeaway: Communicate and educate, early and often.
Pitfall 7: Treating the implementation as just a technical accounting matter
ASC 842 implementation is not a singular task – it’s a project and should be engaged as such. Appropriate project management means answering these questions ahead of your implementation efforts:
- Who are the key stakeholders?
- What data do we need to collect?
- Where do we get this data?
- Are there new policies, procedures, software applications, or reporting requirements we need to put in place?
- Whom do we need to train?
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 point of contact as it leads the implementation effort, but don’t forget to approach it with a formal process.
Takeaway: Take a project-management approach.
Pitfall 8: Thinking “they’re just leases”
Nearly every company finds an unexpected twist or two as it delves into ASC 842 implementation. The most common surprise we see for companies is their true population of leases.
- Example 1 – Client X
Client had leased equipment and operated as if there was only one master lease in existence to represent several hundred units of equipment. But in reality, it had several hundred leases, because each piece of leased equipment was supposed to be tracked separately.
- Example 2 – Client Y
This client had verbal-agreement leases, which still needed to be accounted for under the new standard. Building an accurate catalog took a lot of working backward to achieve.
Knowing your service contracts and how they are delivered can help with coverage of embedded leases.
Takeaway: Be prepared for surprises.
Pitfall 9: Missing methodology buy-in from auditors
The approach your organization chooses to adopt during the ASC 842 implementation process could have a significant impact on your balance sheet, so it’s important to keep auditors in the loop as much as possible.
While auditors can’t give you management advice, they can give feedback on any concerns they might have related to their testing of the implementation or to management’s ongoing coverage of the new lease standard. You can even allow your auditors to sit in on presentations and ask questions regarding your lease accounting.
Takeaway: Keep your auditors informed.
Pitfall 10: Using manual spreadsheets
Acclimating your company to the lease accounting standards means choosing software that streamlines data collection and integrates with existing company systems. Accounting software can ease you into the ASC 842 implementation process by:
- Compiling lease data from multiple sources
- Performing multibook accounting under parallel standards
- Making adjustments automatically in the case of lease modifications
- Creating a full suite of reports to satisfy disclosure requirements
The right lease accounting software simplifies the ongoing management of ASC 842. There are lots of good options, but you want to make sure the one you choose will integrate with your enterprise resource planning system.
Takeaway: Manual spreadsheets are risky. Get a good lease accounting software.
Watch out for these 10 pitfalls to be in a good place with your ASC 842 implementation. The most important thing is to respect the process. Plan for the energy it’s going to take to shift, knowing change doesn’t happen overnight. And reach out to Crowe with any questions. We are happy to help.
