It’s officially crunch time.
There are a little over 6 months left before private companies must meet the FASB 842 compliance deadline. With an average implementation timeline of 4-6 months, those who start now have a pretty good chance of being compliant on time.
But there’s a problem. Private companies are reporting an even lower state of readiness than public companies at this time last year: Almost 40 percent are behind schedule. Some haven’t even started getting ready yet.
Even under the best of circumstances, compliance with FASB 842 isn’t easy. In fact, nearly 55% of companies who have already started this process are finding it more complex than originally anticipated.
Needless to say, the new lease accounting standards represent a big change. To execute accurately, you need to know the who, what, and how of FASB 842. That’s why we’re bringing you the 411 on this accounting change.
FAQs About the New Lease Accounting Standards
You have questions.
And after a whole year of hammering out implementation with public companies, the accounting industry has answers. The three most common questions are probably already on your radar as your team prepares for implementation.
While there are different answers floating around the industry, our experience has helped us nail down proven answers you can trust.
#1 – Will the new standards change lease negotiation, administration, or other business practices?
Yes, the new standards will significantly affect how you do business now and in the future.
In fact, many companies will view the change as an opportunity to review and update leasing practices from stem to stern.
In some cases, the new accounting standards will impact the buy vs. lease decision. Lease negotiators may want to move away from gross leases to those that call out service rent and other charges that don’t need to be capitalized.
The practice of lease administration will come under more scrutiny by auditors and financial managers than ever before, so new levels of review and audit trails will likely be implemented.
#2 What are the potential consequences of non-compliance?
The SEC’s Division of Corporate Finance selectively reviews filings made under the Securities Act of 1933 and the Securities Exchange Act of 1934 to monitor and enhance compliance with applicable disclosure and accounting requirements.
Right now, only consequences for public companies have been outlined. But you can bet they’re going to be similar ones for private companies.
- Lawsuits from investors for the misstated financial statements
- Cost of bringing in fraud examiners to investigate (if it is determined fraud was involved)
- Cost of responding to an SEC Comment letter
- Cost of bringing in consultants to restate prior years
- Auditors getting fined for the misstated financial statements
The cost associated with the above should deter private companies from misstating their financials and taking the new accounting standards seriously.
#3 – How do I choose a lease accounting solution to handle FASB compliance?
Some vendors are offering a bolt-on FASB calculator that sits between the lease administration system and the accounting solution or ERP.
This is a high-risk approach because many day-to-day leasing activities will trigger a schedule reassessment. For example, exercising a renewal, accepting tenant improvement allowances, or any change to rent payments will require a schedule revision.
Since these activities are managed in the lease administration solution, an integrated compliance and management approach makes the most sense.
Executing FASB 842 the right way requires an exhaustively detail-oriented software system. So the vendor selection process should be at the top of your to-do list.
There are 3 key areas you’ll want to evaluate in a solutions provider: features, price, and services.
First, the features must meet your spec requirements. Second, the solution has to be within your budget. But finally – and most importantly – you must consider quality and quantity of services.
Services are mission-critical when choosing a vendor.
Stay in the clear by identifying who will support you after the sale and how. Before signing paperwork, note what you’ll receive as far as:
- Ad hoc reporting
- Abstraction process and timeframe
- Support availability
The mistake most companies make when choosing a vendor is deciding based on features and price, instead of service. Our advice is to pick a technology partner, not a product.
15 Things You’ll Need to Know About Every Lease for the New FASB 842 Standards
Complying with the new standards is going to be challenging for most companies.
However, one action you can take right away to ease the pain and smooth the implementation process is to start gathering the data you’ll need.
Capitalizing a lease under the new FASB guidelines will require the following 15 pieces of information about each lease longer than 12 months, including existing leases:
- What’s the commencement date?
- On which day was the renewal notice signed?
- Does the lease include CPI/Index rent?
- What’s the fair market value of the lease?
- What’s the useful life of the asset?
- Is there a purchase option?
- Has space expanded or contracted during the term?
- How much of a gross lease can be attributed to operating expenses, utilities or other service rent?
- Are there any landlord allowances and when were they received?
- What were the initial direct costs?
- Are there any impairment charges?
- What is the borrowing rate for each lease?
- Does the lease provide for designated parking spaces?
- Are there economic incentives to use renewal options?
- Are you paying less than market rate rent?
One thing to understand is that your lease data will be at the core of FASB 842 compliance. In fact, besides these 15 things you need to know, you’ll have to abstract as many as 55 data elements from your leases. It also requires additional lease data that isn’t commonly abstracted today.
Like most complex changes in life, the devil’s in the details. And the details are what you need to get right.
Common Implementation Mistakes & Misconceptions
There were a lot of uh-ohs and bleeps from public companies as they implemented FASB 842 in 2018 – even as they rushed to get it done in Q1 of this year.
The lessons they’ve learned are not pretty.
To save private companies from experiencing this same mess, we’ve whittled down these pains and problems into the 5 common mistakes almost everyone is making when it comes to the new accounting standards.
#1: Underestimating the Scope
Most companies have massively underestimated the Mount Everest they have to climb to make FASB 842 implementation a reality.
The updated accounting standards mandates significant changes to almost every part of your business:
- Real estate
- Financial reporting
Every single one of those areas will have to be thoroughly combed to pinpoint current lease data. On top of that, your current systems will likely be unable to handle the complexity of what FASB 842 requires you to report on. You’ll need outside resources – most likely from your accounting and audit team and technology solution provider.
New technology will be required and must be integrated. New reporting will need to be built. And you’ll need a couple of months to test.
It’s an overwhelming project requiring dedication from multiple stakeholders. And most companies have severely underestimated the scope.
#2: Data Normalization, Data Hygiene and Data Refresh
Another common mistake is ignoring the necessary and demanding processes to ensure your data is accessible.
Truth is, your data is stored in a variety of places.
You house leases and the data they contain in spreadsheets, existing systems, and file cabinets. You can’t even begin the extraction process until all this data is normalized and has gone through hygiene to make sure it’s accurate.
FASB ASC 842 isn’t everyday, business-as-usual accounting.
It requires you to include data elements you don’t track right now. And that’s why it’s so important to organize your data before diving into implementation.
Pro tip: Without regular hygiene and refreshing, your data will be a dumpster fire. Lease terms are updated constantly, so the data in your system must follow suit.
#3: Transfer From and Integration With Current Systems
Your FASB ASC 842 implementation is a roller coaster ride. And one of the biggest nausea-inducing drops is when you realize your current systems don’t integrate.
You see, the new FASB standard requires you to move a whole new data set from your real estate systems to your accounting and financial reporting systems.
If you don’t have a seamless integration to transfer all this data from place to place, you’ve made a gut-wrenching mistake. It’s not that this problem can’t be solved. It just means you’ll have to build a new integration to allow your systems to talk to each other.
And it’s not as easy as plug and play. It will require significant resources and testing. It’s a huge mistake a lot of companies are making.
#4: Solving for Today’s Problem vs. the Future
We get it. FASB 842 compliance is a fire drill. It’s today’s problem…the one everyone is focused on. No doubt you need to get this right. And most likely you’ll be pressed to meet the deadline.
But there’s also another consideration: What if you used this opportunity to transform your real estate, accounting and finance processes?
A common mistake we’ve seen is companies playing whack-a-mole.
They focus on the problem in front of them. Instead, they should be thinking about how they can use this change as an opportunity to upgrade their entire data storage and reporting systems.
While it’s tempting to focus on the looming deadline in front of you, our advice to is spend time with your team thinking forward.
The time you put into this now will be well worth the outcome in the end.
Conclusion: Procrastination Isn’t Worth the Price Tag
Waiting to start the FASB ASC 842 implementation is like waiting to do your taxes: Hunky-dory in the beginning, but potentially costly, time-consuming and painful in the end.
Just ask any public company that had to do it last year. The longer you wait, the more expensive – in dollars and days – implementation will be. Those who start sooner rather than later will have the advantage of extra time to gather their information and contracts, work out potential bugs in the process and address unforeseen issues.
Solution providers with technology to help will be so focused on these companies, they won’t have the time or resources to address companies that are late to the game. Even if they do squeeze you in, it very well could be at double the price and timeline.
Companies that have started their implementation processes early have avoided the need for hiring extra people, paying fines, and losing customers. They’re sitting pretty.
Then there’s the panic-stricken rush of the companies that wait even a few months too long and end up parting ways with a lot of their hard-earned profits.
Our advice: Don’t procrastinate. Your bottom line will thank you.
Halley Martin, MBA / VP of Marketing