Some companies received a major gift wrapped up in uncertainty when the Financial Accounting Standards Board delayed the effective date for the lease accounting standard last year. Now, private companies that have not yet implemented ASC 842 have until January 2022 to adopt the mammoth standard. Considering that time keeps slipping away, you won’t want to get caught making these lease accounting errors as you go through the implementation process.
Catching Up on Lease Accounting
Any sense of relief that the FASB gave from last year’s delay should have been short-lived. After all, the delay was made in response to the predicted economic impacts surrounding the early weeks of the COVID-19 pandemic, and corporate finance teams were consumed by new ways of working remotely and other priorities.
But now, as the effective date continues to get closer, it’s time to bring attention to the lease accounting standard if your company was not an early adopter (while private companies don’t have to reflect the changes until they file their financial reports for fiscal years beginning after December 15, 2021, early adoption is permitted).
Accounting for Leases: A Short Backstory
Back in 2005, the Securities and Exchange Commission called for a revamped leasing rule, and FASB and the International Accounting Standards Board released their accounting guidance around the same time, about five years ago. While U.S. GAAP makes a distinction between operating lease accounting and capital lease accounting, IFRS lease accounting treats all leases as financial (or capital) leases. The new GAAP rule brings right-of-use assets and associated obligations onto the balance sheet, rather than the footnotes. It also includes more than one operating lease accounting example.
Lease accounting error 1: Procrastinating on Lease Accounting Any Longer
One of the biggest takeaways we have found from helping companies adopt ASC 842? Earlier is better—taking on the new standard for many companies turned out to be more complicated than they initially anticipated. This can turn out to be quite a complex endeavor. Some companies have been surprised by embedded leases in service contracts that they did not initially realize fall under the guidance. The fact is, a contract can qualify as a lease if it includes a promise of the use of an asset for a specific period of time without substitution.
In addition to scrutinizing right of use assets and associated obligations, there’s also the need to calculate the initial direct costs for obtaining a lease and determining the incremental borrowing rate (which was not typically stated for an operating lease). Also, if it turns out your company will appear significantly more leveraged than past reporting periods, you’ll want to be able to explain why.
Lease accounting error 2: Underestimating the Resources Needed
Implementing the new lease accounting standard is a big project that can be surprisingly tricky for some companies. Fortunately, private companies have gained the benefit of time and the lessons learned from public companies that went through it.
Early on, there’s a quick realization that additional resources than first estimated are necessary to get through the lease accounting implementation. Accounting experts can help the company undertake the project in the most efficient way, as they fully understand the standard and can adapt their advice to the exact needs of the company and how they operate. The standard may be new to your company, but financial and accounting experts who are well-versed in what’s needed can save the company valuable time, by getting your team up to speed on the rule, in addition to leading the implementation effort if necessary.
Lease accounting error 3: Failing to Notice the Opportunity
Fortunately, there is opportunity during the implementation process for lease accounting. With the help of accounting experts who have taken earlier adopters through this process, you can discover ways to reconsider how your company makes and tracks vendor agreements. Efficiencies and consistencies could be introduced throughout the company, which could be a great development for the finance team going forward.
The finance team can lean on these expert mentors during this transitional time to help educate the non-finance-minded areas of the business what the new lease accounting standard means for them. With expert advice, you can also get answers to general questions—such as, How do I record a lease in accounting?—and the more complicated—Should we adopt new lease accounting software, and what are the best system options for our company?
Taking the Next Step on Lease Accounting
When you’re under a time crunch or your resources are overwhelmed, finance and accounting experts can respond and get everyone up to speed quickly. This will save your company so much ramp-up time and result in an easier overall process. Find out how our technical accounting experts can help your company today.
