The last few years were busy for companies with their efforts to adopt ASC 606, Revenue from Contracts with Customers. Alas, there’s no time to rest with ASC 842, Leases, especially given that the January 1, 2022 adoption date for calendar year-end private companies remains unchanged.
One important lesson we’ve learned from implementing ASC 842 with our clients is that it’s best to begin working on the implementation of new standards as soon as possible, especially when a change is so significant across all companies and industries. The time to begin is now! Unfortunately, our discussions with private companies indicate that many companies are still coming up to speed on ASC 842 and just starting to assess the impact it will have on their leases and operations.
Adoption of new standards is always challenging, and ASC 842 is no different. ASC 842 represents a fundamental change in lease accounting and could materially impact a lessee’s financial statements and leasing strategy. From understanding the technical accounting impacts and nuances of the new guidance, to the heavy lift of data collection in determining the entire lease population, to educating non-accountants within an organization to help define potential impacts, to designing new processes, to modifying or implementing systems to address the new requirements—there is a lot to do! We encourage companies to accelerate their efforts to understand and digest the standard before the madness at year end.
We suggest performing the following initial steps towards adoption:
Understand accounting requirements
The biggest change in the standard is the creation of right-of-use assets and liabilities for operating leases by lessees that now have to be put on the balance sheet. The accounting policy team may be responsible for analyzing the technical language in the standard, but there are very real implications of the new standard on other teams outside of accounting, like treasury or real estate teams. During ASC 842 implementations, we’ve seen non-accounting functional groups be slow to understand the impact of the new standard. This is an area you will want to get ahead of to ensure a timely adoption and understanding the implications to your entire organization.
Analyze data collection and lease population
Your company may have a robust process to collect leases using third-party software and a strong understanding of the types of leases and total population, or it may rely on manual data from any number of submissions across the company that come in once a year, such as the data collection process for the lease footnote disclosure under ASC 840. Whatever the case, one of the first steps in adopting the standard is to ensure you have a full picture of your company’s leases and how to begin slicing the population into smaller pieces to analyze. Identifying a complete and accurate lease population has proven to be a time-consuming challenge for many companies.
Assess capabilities of existing software and lease data gap analysis
Your company will also need to determine if the current process of data collection can be leveraged to collect the new data needed for the required calculations and disclosure under ASC 842. Companies with existing third-party software may already be in contact with those vendors about their ASC 842 capabilities to assess capabilities. For those with manual data collected in spreadsheets, a closer look is needed to determine if any data is already collected that fits ASC 842 requirements and how much effort is needed to continue to use spreadsheets to collect additional data. We are seeing many companies now need to implement a software tool to meet the requirements and managing ongoing compliance.
Create an implementation roadmap
With the knowledge gathered in the previous steps, companies can begin to create an implementation roadmap to create an adoption plan for ASC 842. Additional areas to focus on in the roadmap include creating new controls, determining an incremental borrow rate to use in calculating the right-of-use assets and lease liabilities, assessing any impacts to debt covenants, and proactively working with auditors. A dedicated implementation team should be created to put the roadmap on track for adoption with regular updates for management.
How MorganFranklin and Vaco Can Help
We have dedicated and experienced professionals who understand the challenges private companies face in assessing and adopting the new standard. Our collective team provides all of the expertise needed for a successful ASC 842 adoption, including technical accounting analysis, financial statement disclosure drafting, lease accounting software vendor selection and implementation, lease abstraction and data mapping, incremental borrowing rate calculations, business process redesign, internal control documentation updates, project management, and training. We take a thoughtful approach to adoption and ongoing compliance, helping to drive better planning and decision making not only by providing a tactical and pragmatic plan for adoption, but also by identifying and leveraging strategic opportunities along the way.