While private companies have until Dec. 15, 2020 to become compliant with ASC 842, my advice is simple: Don’t wait. Unless all your company’s capital and operating leases are short-term — that is, 12 months or less in length — you have work to do.
Public companies have largely gotten their arms around ASC 842, and it makes sense for private firms to learn from their experience. In my work with those trying to get compliant, I see two major roadblocks.
First is a lack of internal expertise. You need to assess the financial and business effects of the standard, a task that extends well beyond accounting. For example, the CIO may need to weigh in on leased computing hardware. Talk to operations and facilities about service contracts, company vehicles and large equipment.
Second, I see firms come up short on budget and time to set aside to perform needed tasks. That’s where starting early comes in, along with the need to keep company leadership informed.
There are benefits to being in compliance. For example, our latest Brainyard survey of 361 executives at a range of companies suggests that 2020 is going to be a big year for M&A. About half of respondents from firms in the $51 million to $500 million band say they plan to acquire one or more companies in 2020. For private companies looking to be acquired or to raise funds, ASC 842 helps potential buyers or investors feel comfortable with how your firm has structured leasing transactions, compare the financial details of lease commitments and gain insight into any risk exposure as a result of leasing.
Failure isn’t an option, unless you want to take a hit to your banking relationships, net income and tax liability.
My advice for those starting from scratch is to go to the AICPA website. Check out some webinars and checklists. In this video, I lay out the four criteria to evaluate Excel replacements. Here, I discuss the importance of ferreting out all the leases that are affected (opens in new tab).
Let’s face it: There won’t be more ASC 842 experts available to hire as we get closer to Dec. 15. So be proactive, get a jump now and make sure that you don’t spend Thanksgiving weekend combing through contracts.
Want to learn how you compare to your peers when it comes to preparing for the new lease accounting standards? Take this short survey to help determine your pain points as well as how the new standard will affect business priorities.