The deadline for private companies to implement the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842 is fast approaching.
While the standard was effective for public companies in 2019, private companies have continued to receive deferrals on the implementation date, most recently being pushed back from years beginning after December 15, 2020 to years beginning after December 15, 2021.
Through our experience in working with many of our clients who have already adopted ASC 842, we have included a listing of five key lessons learned from the adoption of this standard.
Lesson #1: Start the Process Early!
Most organizations that have adopted the new standard have found that the implementation process took much longer than originally planned. The process will require changes to business processes and controls, identification of all lease agreements, data extractions, and likely implementation of new software.
Lesson #2: Know Your Lease Portfolio
Once the process begins, organizations have found their knowledge of their leasing portfolio may not be as strong as they thought. It is crucial to know all the critical data points. Many have found there to be more lease agreements than their accounting departments were aware of. There have also been many situations where there was little to no documentation of lease agreements or outdated information on the leasing structure. Another significant issue has been embedded lease agreements. Organizations will be required to assess current service contracts to identify if they qualify as lease agreements.
Lesson #3: Cross-Functional Collaboration Is Needed!
With all the nuances involved in the standard, it is critical to have more than just your accounting department involved in adoption and implementation. Other key areas that should be involved include legal, IT, purchasing and any other areas that may have knowledge of any leasing needs or will be included in the collection of key data.
Lesson #4: Discuss Expected Impact With Stakeholders
The adoption of ASC 842 will have a significant impact on the balance sheet of many organizations. To avoid unnecessary complications, be sure to discuss the expected impact with all key stakeholders involved early in the process. This includes those inside and outside the organization, such as the Board of Directors, management, banks and investors.
Lesson #5: Software Is Key
Selection and implementation of a lease accounting software will be vital to ensure a smooth implementation of ASC 842. Whether it is data collection, the output of monthly entries or the generation of reports, the software must be easy to use with little learning curve required. It is important to know how a new system connects with existing software applications, as well.
Organizations need to find a suitable solution for calculating the FASB ASC Topic 842 right-of-use assets and lease liabilities at the transition date and the subsequent lease accounting. Generally, an Excel-based solution would be appropriate for a noncomplex portfolio of 10 or fewer leases. If the lease profile is more complex or greater than 10 individual leases, management is better served by a lease software solution, such as simpLEASE. In addition to offering our clients simpLEASE, Schneider Downs provides advisory services for the technical aspects of lease accounting. For more information concerning lease accounting and the impact on your organization, please visit the Schneider Downs Our Thoughts On blog or email us at [email protected].
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The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.
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