In short:
- The Accounting Standards Codification Topic 842, better known as ASC 842, will take significant work to implement
- A big part of that effort: finding and assessing all of your existing leases
- There are tools that can help; we also recommend assembling a cross-functional team and performing a comprehensive impact assessment
Under ASC 842, public companies were required to change their accounting practices by the end of 2019; private companies have until the close of this year. As we discussed previously, the regulation is intended to shut some ASC 840 loopholes that have led to many leased assets not showing up on balance sheets. Now, both capital and operating leases with terms greater than 12 months must be accounted for.
The effects are far-reaching, from IT systems that may need to be reclassified to the work it will take to revise your accounting processes. A KPMG survey shows that the Top 4 challenges are identifying embedded leases, establishing an appropriate incremental borrowing rate, abstracting and entering leases into a leasing system and integrating a lease accounting system into the existing environment.
Only 44% of those surveyed had identified their leases, and 23% expected to spend $500,000 or more on compliance. Ouch.
For private companies, there is still time to complete projects on time and without throwing piles of money at the problem as the deadline closes in. A big key to success is the tools you select. In our own survey of 234 accounting professionals and CFOs, 8% said they’d outsource the discovery and compliance effort, 15% will use their existing ERP systems and 22% will implement a third-party tool. Most, 55%, think Excel is up to the task.
Maybe, but before you burn precious time building a bunch of new spreadsheets, make sure that Excel can handle the balance sheet entries, disclosures and calculations required for your company to comply with ASC 842. Spreadsheets are definitely useful to get the financial analysis right. But ongoing management of the process might be a different story.
In the video, we discuss the four criteria to evaluate Excel replacements. Other tips to help choose the best path forward include conducting an accounting impact assessment to understand how the standard will affect you. Also, make sure you assemble a cross-functional team, beyond just accounting. You might need real estate managers or the CIO.
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.
