The verdict is in: the Financial Accounting Standards Board (FASB) will not issue a third delay to the ASC 842 effective date for private companies, which will take effect Dec. 15, 2021. This means many firms may be flat-footed when the new standards go into effect.
If you thought you would have had more time to prepare for the new lease accounting standard, you’re not alone. As of late July 2021, 75 percent of surveyed senior accounting and finance professionals at private companies with more than 1,000 employees said they were not yet compliant with ASC 842, with 30 percent less than halfway through the process. Furthermore, 40 percent claimed they were only somewhat confident about their ability to successfully adopt the new standard in time for their next scheduled reporting period after Dec. 15. This data indicates that many private companies were, indeed, waiting for another extension.
In addition to the pressures of the looming lease accounting standard, companies are still adapting to the ongoing effects of the pandemic. In fact, 80 percent of commercial real estate tenants experienced negative effects due to inadequate lease controls during the onset of COVID-19, including missing options to extend deadlines, miscalculating lease costs and forgetting to update unfavorable or unwanted lease terms.
The silver lining in all of this is that the scramble to achieve compliance with ASC 842 can also provide companies with an opportunity to gain a better vantage point on their leases, giving them the insights they require to plan ahead. The only caveat, of course, is time. Private companies cannot spare another moment. Leases are dynamic agreements, and the rules surrounding the already complex standards are ever-changing. Not to mention, many of these same companies have made modifications to existing leases, which directly affects accounting and reporting, further complicating things.
To ensure compliance with ASC 842 and simultaneously maximize the value of their leases, affected companies must act now. Here’s how to get started.
Assemble Your Key Players
Achieving and sustaining lease accounting compliance starts with collaboration. Align your accounting, FP&A, real estate, IT, legal and procurement teams. If you’re short on resources or find that the task is too big for the time remaining, it can also be helpful to add specialized players to the mix, whether they’re new hires or outside service providers. Experienced lease accounting, project management and other professionals can accelerate and streamline the process while also minimizing the risk of errors.
Gather Your Lease Data
Gathering important lease data is integral to your reporting process. In fact, without proper lease management, it’s near-impossible to accurately report on your leases. And because there can be as many as 70 data elements — from lease terms and payment schedules to end-of-term options and incentives — required for compliance with ASC 842, collecting and managing this information can be extremely overwhelming.
And yet despite how critical lease information is to the lease accounting process, 41 percent of companies reported that they weren’t yet compliant with the new standard because they hadn’t successfully gathered all their lease data. After gathering your core team, prioritize understanding the type of data you need and where it’s located in your organization. Once you have that information in hand, you can move on to the next step.
Establish a Centralized Lease Portfolio
By having your leases in a centralized system, you’ll be able to easily (and quickly) access important data. Dedicated software can also automate critical parts of the lease accounting process while also reducing the risk of human error and providing you with greater visibility into your leases. All of these features can help you uncover overpayments, unreceived lease incentives and other cost-saving opportunities.
Work closely with your IT team, who you should have already involved at the onset of this project, to identify and implement a solution that easily integrates into your existing tech stack, ensuring the largest possible ROI on your new system.
It’s Time to Get Moving
With a concrete deadline and a lot of work ahead, it’s time to get started — if you haven’t already — on transitioning to ASC 842.
Preparation is one of the most significant hurdles to lease accounting compliance, and the faster you can bring your team together to collaborate on data collection and establish a centralized repository, the better positioned you’ll be to meet the new standard and gain a better understanding of your lease portfolio.