In late 2019, the Financial Accounting Standards Board (FASB) provided relief to private companies by deferring the effective date of the leasing standard to annual financial reporting periods beginning after December 15, 2020 (2021 for calendar year-end companies). With the ongoing efforts to adopt ASC 606, private companies had found it difficult to also adopt ASC 842, therefore, the Board voted to officially defer the effective date to implement ASC 842.
Despite the deferment, some of the “simpler” changes have proven more difficult than companies originally anticipated. That’s where we come in. MorganFranklin has assisted many public and private companies with their adoption process and identified two main areas where finance teams often underestimate the time requirements. Those two areas are: Identifying the lease population and, if necessary, selecting and implementing a technology solution.
Identifying the Lease Population
One of the most time-consuming aspects to implementing the new standard is often the process of identifying all lease transactions. This process requires a thorough understanding of what constitutes a lease under the new standard, as well as a robust data collection process. Often the data compiled for disclosures under ASC 840 is incomplete, and processes and internal controls are necessary to ensure the identified lease population is not missing key components. Additionally, it is important to understand how to identify contracts that contain embedded leases, which add to the efforts in identifying the complete lease population. See our prior blogs titled “ASC 842: Understanding the Accounting Requirements” and “ASC 842: Understanding Lease Population” for further insight into the new standard and identifying the lease population.
Selecting and Implementing a Technology Solution
ASC 842 requires companies to calculate right of use (ROU) assets and liabilities for each lease (subject to practical expedient selections); these balances must be refreshed each period as payments are made. Depending upon the number of leases, an appropriately controlled excel file could be all that’s needed, however, as a rule of thumb, it’s prudent for a company with over 50 leases to think about a technology solution. Increased disclosures required under the new standard may also be facilitated by the right system. See our prior post titled “Assessing Capabilities of Existing Technology and Lease Data Gaps” for further considerations when identifying technology solutions.
How many leases a company holds, and what systems are already in place, will determine the time and effort required for implementation. Although the adoption timeline has been extended, private companies should remain diligent in assessing the changes and implementation efforts required for adoption.
With the additional “gift” of time from the FASB, we encourage companies to become familiar with the new requirements, identify the impact, and propose adoption strategies to drive better business decisions. At MorganFranklin, we have dedicated and experienced professionals who understand the challenges private companies may face in adopting the new standard. We can help you to take a thoughtful approach to compliance, which includes a consideration of practical expedients, necessary controls and procedures for sustainable reporting, and the right information to meet disclosure requirements ahead of the adoption deadline.