Lease Accounting

Capitalizing On the Lease Accounting Deadline Extension

Rather than shelving the compliance project to be picked up at a later date, firms must leverage this time to be more strategic in their approach.
Vincent RyanJune 18, 2020

Traditional lease accounting adoption methodologies involve significant upfront costs, resources and software deployment. The ongoing, sustained compliance with the new lease accounting standards also requires a commitment of internal resources, time, software administration, and training.

Due to these hurdles and ongoing economic challenges, the Financial Accounting Standards Board (FASB) offered a one-year deferral of ASC 842 or private companies, private non-for-profit (NFP) companies, and certain public NFP companies. The Governmental Accounting Standards Board (GASB) offered an 18-month deferral of GASB 87 for government organizations and certain colleges and universities that report under the GASB standards.

For some organizations, the extension has already paused their decision to move forward with implementation and adoption. According to a recent LeaseAccelerator survey, 25% of respondents noted they had started their GASB 87 implementation but were now delaying it to match the new deadline. Furthermore, 28% of respondents noted that they started their GASB 87 implementation project but were now delayed until work-from-home restrictions have been lifted.

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While the delay may enable some firms to focus on core business needs, it does pose potential long-term risks and challenges as firms move closer to the ultimate adoption date. Key areas of concern will consist of decreased availability of quality consulting and partner resources, less flexibility in software and services timelines, and premium prices for solutions and support resources.

If prioritized this year, firms can have ample time to document and implement operational and accounting process changes and improvements.

Rather than shelving the project to be picked up at a later date, firms must leverage this time to be more strategic in their approach. Those seeking long-term adoption success can use this time to yield more favorable implementation terms and more seasoned resources, reduce the overall cost of compliance, and button-up the retrospective requirements of ASC 842 and GASB 87. Additionally, private companies and government organizations can take advantage of lessons learned from public companies to best plan for a smooth, efficient, and compliant implementation without having to sacrifice quality due to time constraints.

Managing Additional Time

Delay does not mean cancellation. The deferment of adoption dates provides an opportunity for organizations to utilize existing resources over a longer time period to smooth out the implementation, achieve compliance with the new standard, and reduce overall costs of both implementation and ongoing compliance.

If prioritized this year, firms can have ample time to document and implement operational and accounting process changes and improvements. They can also avoid resource constraints and related higher demand pricing as the deadline approaches for software costs, implementation services, and technical accounting guidance. Organizations can benefit by leveraging software to ensure that lease populations remain complete and accurate until the actual transition date as well as use the additional time to automate processes around GASB 87, which would eliminate a number of manual processes.

For organizations that have not yet started, it is essential to begin early to spread resource commitments across remote teams. Our 2019 study, “Private Companies and Lease Accounting: A 2019 Progress Report,” which surveyed over 350 finance and accounting leaders from U.S.-based private companies, found higher-than-anticipated complexity. Almost 55% of companies found the lease accounting project to be more complex than originally anticipated. Collecting data, modifying business processes, and project-managing the enterprise-wide effort were amongst the top three challenges.

By leveraging internal resources over the longer period, firms can significantly reduce overall adoption costs. The longer timeline also enables firms to be in a better position to perform requirements-gathering for potential solutions, identify business partners for support, review software solutions, and gain access to the most experienced consultants.

Public Company Lessons

Private companies and government organizations can further benefit from having an extra year to prepare for ASC 842 and GASB 87 by learning from the real-world experiences of public companies that adopted the standards throughout 2019. Also, as many private and governmental organizations begin their implementation projects, they will have the benefit of being able to consult public SEC filings for their peer group to see real-world examples of quantitative and qualitative disclosures.

One key example of this can be found when public companies in the first quarter of adoption struggled with issues such as proving the accuracy and completeness of their lease population.

However, perhaps the greatest challenge of all was the need to track changes to the lease portfolio. A company with 300 leases will have to track an average of 230 events in a single year as assets come off lease, new leases are signed, and changes occur throughout the lease term. Real estate leases have frequent rent changes as well as expansion clauses, tenant improvement allowances, and early renewal options that can be executed at various points in a 10-year lease.

Equipment assets under lease can be lost, stolen, damaged, purchased, returned, renewed or upgraded during the relatively short term of a three-year lease. Tracking these activities manually with spreadsheets and emails proves challenging to the most organized accountants.

Additional lessons from public companies showcase how collecting data, implementing systems, and modifying business processes were some of the largest work efforts required prior to day one. However, many additional activities needed to be completed as well, which many public companies underestimated. Most of these fell into the “last mile” of the project in the final 90 days before the transition. There are over 100 billion combinations of use cases that can exist under ASC 842 when considering the different payment structures and events that can occur throughout the leasing lifecycle.

In addition to developing a strong test plan, project teams will need to train end-users and communicate policy changes throughout the organization. Perhaps most importantly, companies will need to staff a team of lease accountants to perform ongoing analysis of changes to the portfolio. Some may even need to build centers of excellence that are specifically focused on leasing.

Lease accounting will need to fit into an entity’s month-end close process. A proper lease accounting and lease lifecycle management system will have two critical features: all the features of a subledger, similar to an accounts receivable or an accounts payable subledger but with much more detail and the ability to properly close each period and provide both prospective and retrospective reporting information that respects information relating to prior closed periods.

As private and government organizations evaluate the new timeline for initial and ongoing compliance, as well as gaining benefits from the lease accounting data being unearthed to benefit the business, they should be mindful not just of initial compliance, but also of the need to set up scalable business processes for day two and beyond.

Perhaps the biggest challenge will be automating completeness, accuracy, and internal controls around new leases and changes to existing leases. Each month new leases are being signed, expiring leases are being terminated or renewed, and existing leases are being modified. These changes will need to be promptly communicated to the accounting team before the month-end close to ensure accurate calculations. Ultimately, success with lease accounting will demand an enterprise-wide effort to regularly communicate changes to the portfolio across business units, corporate functions, and the accounting team.

Len Neuhaus, CPA, is vice president, lease accounting, at LeaseAccelerator.