2017 was a busy year for public companies with their efforts to adopt ASC 606, Revenue from Contracts with Customers. Alas, there’s no time to rest with ASC 842, Leases, coming up for adoption by the beginning of 2019.
One important lesson we’ve learned from implementing ASC 606 with our customers is that it’s never too early to begin working on implementations of new standards, especially when a change is so significant across all companies and industries. Unfortunately, our discussions with companies and reviews of public company 10-K forms indicate that many companies are still coming up to speed on ASC 842 and attempting to assess the impact it will have on their leases.
Adoption of new standards is always challenging, and ASC 842 is no different. From understanding the nuances of the new technical guidance to educating non-accountants within an organization to help define potential impacts and designing new process and 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 and even consider early adoption so that the heavy lifting of data collection and disclosures is completed before the madness at year end.
For private companies, the lease standard adoption date is 2020. Because ASC 606 is effective in 2019, however, these companies should strongly consider applying ASC 606 and ASC 842 at the same time rather than staggering two major implementations one year after another. In particular, the adoption of both standards may require restating prior year financial statements in certain choices of retrospective application, so concurrent adoption and restatement may lead to a simpler effort in financial reporting.
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. 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 treasury or real estate teams. During ASC 606 implementations, we’ve seen non-accounting functional groups be slow to understand the impact of the new standard. This is an area to get ahead of for ASC 842, as well.
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 in Form 10-K contractual obligations. 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.
Assess capabilities of existing software and lease data gap analysis
The next step is to determine if the current process of data collection can be leveraged to collect the new data needed for disclosure under ASC 842. Companies with existing third-party software may already be in contact with those vendors about their ASC 842 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.
Create an implementation roadmap
With the knowledge gathered in the previous steps, companies can then create an implementation roadmap to create an adoption plan for ASC 842. Again, there are lessons to be drawn from the implementation of ASC 606. Potential areas to focus on in the roadmap include creating new controls, as well as working with auditors. A dedicated implementation team should be created to put the roadmap on track for adoption with regular updates for management. One area to not overlook is that the presentation of leases assets may shift the way companies desire to show their leases from Operating to Financing—getting started on understanding the potential impacts may create opportunities to effect the necessary changes to accomplish that objective.