By Mike Hammerslag, Principal Consultant, Financial Applications and Strategy and Senior Product Manager
It has taken some time to get here, but it finally appears that there will be no further delays or extensions to the adoption/disclosure date of the FASB ASC 842 lease accounting standard for private companies.
Private companies fall under the category known as “all other entities” and have a wide range of leased real estate and equipment, from those with small portfolios to those with billions of dollars of obligations. No matter where you fall within this group, many of your public company brethren ― supermarket chains, convenience stores, mall-based retailers, industrials and others — have successfully implemented the standard.
Let’s look at some of the key areas where you can learn from the experiences of companies who have already adopted ASC 842.
The Adoption Details
As a quick review, private companies must adopt ASC 842:
- for fiscal years starting after December 15, 2021
- for interim periods and fiscal years starting after December 15, 2022
Put another way, the first disclosure for most private companies will be for the fiscal year ending December 31, 2022, and all subsequent quarters (reporting periods) thereafter.
Only the occurrence of a black swan event in the next six months could cause a further delay.
The ASC 842 Team
ASC 842 adoption is a team sport. Public companies who have successfully adopted and private companies who have already implemented the standard did so with the help of software companies, advisors, and implementation partners. All those players were working in tandem to ensure the company gained compliance.
Keep in mind that ASC 842 lease accounting adoption is not an accounting-only project. The data that the accounting team ultimately places onto the balance sheet and other financial disclosures of the firm is driven nearly singularly by the inputs of the lease administration team from the real estate department. (Equipment leases usually fall under a different group’s responsibility but are still disclosed.)
What happens if the correct team isn’t involved from the start? Here at Accruent, we have seen firsthand where public companies are once again searching for a new solution just two to three years after implementation because they failed to bring the correct team together. In many cases, the tool selected by the accounting team just does not work well enough for the lease administration team. You know that team ― the one that makes sure you do not miss terms, options, and covenants that will cost your firm millions of dollars if not executed properly and timely.
While those two groups may be generally the most important, the team goes far beyond lease accounting and lease administration professionals. Typically, a complete team to guide the adoption of ASC 842 includes staff and input from:
- Procurement
- IT
- Legal
- Treasury
- Tax
- FP&A
- and others
Our recommendation: Bring them all to the project, as early as is feasible.
The Lease
What is the lease and where is it? If only it could be as simple as opening the filing cabinet, looking at a document in a folder, seeing that it says “LEASE” at the top of the page, celebrating that you have found one, and repeating the process.
Instead, finding the leased assets of a firm is much more about understanding the business of the firm and how that business is executed.
In the area of real estate, you must understand whether you rent offices, warehouse and distribution, and potentially retail spaces, and then examine what you sublease or own — and how you use those assets.
In the area of equipment, you must look at whether you are leasing IT equipment or fleet vehicles, whether for “delivery” or for the executive team. Is the artwork in the halls or the furniture in the offices leased? Did the marketing team lease billboards? Answering these and other questions will drive a big-picture understanding of your leased assets.
And then there are the legal documents. Some documents may seem more like operating agreements than leases, but because of some requirement or restriction you have placed in the agreement or perhaps the significant use you have placed on the asset, you have effectively created a lease. You must take these operating agreements into account and add them to the pool of leased assets.
Additional Lessons Learned from ASC 842 Adoption
Aside from the best practices above, here are some of the learnings our customers have shared.
- It will take longer to adopt than you think. It isn’t too late, but the time to focus on ASC 842 adoption and implementation is now.
- You will still be finding the odd lease years after you have adopted. After you add it, also evaluate it to determine if it represents a class of assets that perhaps you have missed. This will aid in making sure similar leases aren’t out there.
- It’s important to create a written plan before adoption. A written plan will help your team prioritize actions and ensure alignment.
- You’ll likely need to evaluate and potentially change your business processes during or after adoption. Whether you buy or lease, it’s going to be on the balance sheet from this point forward. This is particularly true of equipment and may lead to changes in how you choose to acquire these assets.
- Communication with your outside auditor during the process is vital. Only your auditor can tell you if you are compliant.
We have a lot more to share, so please reach out to us directly! We’d love to meet with you in person at the upcoming National Retail Tenants Association (NRTA) show in Phoenix this September. No longer just for retailers, you will find more best practices at this must-attend event for the real estate lease administration industry.
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