Are we overstating the work involved to implement the new lease accounting standard? The answer to that is yes for most organizations. Experts tend to make generalizations across an entire population, which has caused concern for many who need to implement the new lease standard.
It’s true that some organizations have hundreds of leases and, overall, there are likely to be millions of leases in the U.S. At the same time, in conversations with hundreds of CPA firms, they tell us the vast majority of their clients have 20 or fewer leases, often just with one or two leases. This means implementation will not be that difficult for the majority of organizations.
If your organization has 20 or fewer leases, I am speaking to you.
Practical expedients for transition leases
Your organization should seriously consider adopting the “package of three” practical expedients for leases that exist on the initial application date of the new lease standard. The FASB understands that finding original lease information could be time-consuming and complicated. When you adopt the “package of three,” implementing the new lease standard for these transition leases is easier because:
- Lease Identification: You don’t need to examine existing contracts to determine if they contain a lease under the new lease standard.
- Classification: There’s no need to assess whether the lease should be classified as operating or finance under the new lease standard. Instead, if you properly classified the lease as “operating” under ASC 840, the practical expedient allows you to classify it as “operating” under ASC 842. If a lease was properly classified as “capital” under ASC 840, consider it a “finance” lease under ASC 842.
- Initial direct costs: Despite the change in definition for initial direct costs, you do not need to reassess these costs for existing leases.
When you take advantage of the “package of three,” you can dramatically simplify implementation because you limit the amount of information needed for each lease. You will simply need:
- Lease end date: Consider whether you are reasonably certain to renew or terminate your lease;
- Discount rate: By asset class, use either the federal risk-free rate or your collateralized borrowing rate;
- Existing lease classification: Operating vs. capital/finance;
- Remaining lease payments after the initial application date of the standard; and,
- Any existing balances on the balance sheet for this lease.
With the “package of three,” the new lease standard is complicated only if you perform the initial and ongoing calculations using a spreadsheet. You may want to collect the lease data in a spreadsheet, but leave the calculations to the software.
While determining the initial entry is relatively straightforward, the footnote disclosure calculations and any future lease revisions are not simple. As one CPA firm partner told me, “Spreadsheets are cumbersome and fragile,” and they are best avoided for ongoing lease accounting purposes, especially if you want to keep your audit fees down.
Sooner = easier
With any new accounting standard, organizations commonly wait until the last possible minute to get started. With the new lease accounting standard, the sooner you get started, the easier it is to implement. Here’s why:
You only need to apply new lease standard judgment on a go-forward basis, with the full standard applying to new leases starting after the initial application date. You are most familiar with your lease terms when you first enter into the agreement because this is when you are actively involved with the lease documents. The longer you wait, the more difficult it is to find the right information and determine the correct inputs.
Also, there’s likely to be an internal process change to pass new-lease information along to accounting departments. Avoid a crisis at year-end by starting early on this process change. Whether it’s branch managers, procurement or other department heads, they now need to include the accounting group for more than lease payments.
For example, consider a company with three office locations. One of the offices moves to a new space and rents a copier. Previously, the accounting group might never receive lease documents; they were simply told what to pay and when to pay it. Now, they need the documents to properly record the lease on the balance sheet.
For organizations preparing for the new lease accounting standard implementation, there are an abundance of tools available, including lease abstraction tools, embedded lease identifiers, checklists, guides and calculators to support your efforts. Before picking up your first lease document, spend time reviewing the available resources to further simplify your efforts.
Reviewing lease documents can be intimidating, and it’s easy to get distracted from your initial purpose. Consider separating a comprehensive lease analysis from abstracting data for lease accounting. Both are important exercises. By reviewing leases for accounting purposes, you may discover a real need for a deeper dive into your leases. For that analysis, hiring a subject-matter expert could be well worth the investment. They can quickly give you insights for saving money and improving terms on future negotiations.
Reach out to the experts who already cut their teeth on public company implementations. CPA firms have lease accounting experts who know the standard inside and out and can help with implementation. In addition, there are accounting consulting organizations ready to answer lease accounting questions. Lease abstraction services can help analyze real estate and equipment leases and help you with lease accounting.
Potential delay
Some people are suggesting we should delay the new lease accounting implementation date again. Even beyond the fact that implementing the new lease accounting standard is not an unreasonable effort for many organizations, delaying this standard would have an adverse impact on accounting itself.
Financial statements for public companies vs. private companies are currently not comparable, especially due to the significant impact the new lease standard has on the balance sheet. This can affect acquisitions, analysts examining industries with both public and private participants, and banks looking to properly assess risk without comparable financial statements.
There will always be a lot going on. While I do believe the initial pandemic delay was a good choice, it also means that we providers are ready. Our collective resources have been reviewed and improved with the experience we gained through implementing the standard for public companies. Most providers have SOC reports available that increase confidence in the accuracy of our calculations. Our track record is further bolstered by the companies that have used our systems over time.
Finally, a delay with this standard means the FASB will be further delayed on other changes that improve the usability of financial statements. While it makes sense to have some time between standards, delaying the lease accounting standard means other initiatives are pushed out even longer. Even conversations about new standards are complicated if the previous ones are not yet effective.
It’s important to understand that most companies have straightforward leases and implementing the new lease accounting standard will not be overly difficult. Don’t be scared and don’t push it off. As long as you utilize the tools, resources and knowledgeable experts available to you, this will be manageable.
