Many Companies Still Face Significant Lease Accounting Challenges
The Financial Accounting Standards Board (FASB) has finalized a one-year delay in the effective date of ASU 842 Leases for non-public business entities. The details of the proposal, including a description of affected entities, were described in a previous alert.
The new effective date for calendar-year-end preparers that are not public business entities would be Jan. 1, 2021. The effective date for calendar-year-end public business entities, employee benefit plans, and not-for-profit conduit bond obligors is Jan. 1, 2019, and would remain unchanged.
Even with the ASC 842 delay, many private companies still face significant challenges when it comes to building internal controls that will help them identify relevant leases and comply with the new rules. It’s likely that the best solution will be some combination of software and advisory services offered by your CPA firm.
The time to start considering an action plan for ASC 842 compliance is now. For more information on how the new lease accounting standard could impact your business, contact Katy Al-Khalidi at 716.847.2651 for a complementary discussion of your situation and a road-map to lease accounting compliance.
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Financial Accounting Standards Board’s (FASB’s) new lease accounting standard ASC 842 may require new software for management and reporting purposes
Private entities got some relief from the Financial Accounting Standards Board (FASB) with the recent proposed extension of the effective date for ASC 842, the new lease accounting standard. Compliance has been challenging for many businesses because it involves both a substantive review of lease policies and portfolios (issues we’ve covered in previous articles) and a technical review of the software needed to effectively track and manage information related to leases.
This article is intended to help you understand and evaluate some of the options available in a very crowded marketplace of lease accounting software. To begin your analysis, ask yourself a couple of basic questions:
- Does your business’ current system track the information needed to meet the demands of reporting under the new rule?
- If not, do you want to implement a system focused solely on compliance with financial reporting requirements, or do you want a more complete lease management program?
Three Types Lease Accounting Software
Options fall into three basic categories.
- Excel: Many businesses have been tracking leases on spreadsheets that were created in-house and adapted as needs changed. For businesses with approximately ten or fewer leases, these sheets may continue to support compliance with the new standard, but they will always come with a higher risk of error. The data entry process and the use of formulas programmed in-house are just a few of the pressure points where spreadsheet solutions tend to break down.
- Lease compliance software: If your primary focus is compliance with the new lease standard, some software packages offer more targeted solutions focusing on helping you meet the reporting requirements of the new standard.
- Lease management software: If your business has a higher number of leases, or if you currently struggle to keep track of your leases, you might want to consider a software package that focuses more broadly on lease management, in addition to compliance with the new standard.
Factors to Consider When Selecting Lease Accounting Software
Just like any other software decision, there are several variables to consider when choosing which lease software is the best fit for your business.
- Lease Accounting Software Cost: Prices will vary significantly based on what features you want to include in your system. Be sure to understand up-front if the price quoted includes set-up fees or if you will need to pay an additional amount to get your business up and running on the new program. Other terms to discuss include:
- Annual v. monthly fees-If you’re in a period of growth, it might make sense to avoid a longer-term commitment and to consider software packages that include upgrade options so that you don’t need to start over with a new vendor if you need additional features.
- Cost per user-How many people will need access to the system and how spread out geographically are they? Does the software pricing structure include thresholds where price jumps significantly with an additional user?
- Cost per lease entered-Another place to watch for threshold numbers where price jumps significantly when the number of leases entered increases.
- Quantity of leases: If you’ve evaluated your lease portfolio and you’re still comfortably under ten leases, your existing spreadsheet process might be enough to support compliance with the new standard. There’s no bright line at which a business must invest in lease accounting software, but many will find that a quality software program can save time and improve accuracy even if they manage only a few contracts.
- Type of lease: Software can vary widely in its ability to serve different types of leases. If your business leases a variety of assets such as machinery and equipment, office space and land, you want to make sure that any software you choose supports all of these types of leases. If you’re more focused on one specific type of asset, some vendors offer more targeted software programs designed to better accommodate one type of lease, such as real estate leases.
- Lease management functionality:
- How effective is your current system of lease management?
- Are you able to easily identify the number of leases in your system and look up the terms of any given lease?
- Are you missing key deadlines?
If lease management is a strength for your business already, you may not need to invest heavily in software to improve in this area. However, if it’s an area where your business needs to improve, options for lease management software can include the ability to track items such as physical location of your leased assets, upcoming payments, lease extension or termination deadlines and more.
Connect with a Freed Maxick Lease Accounting Software Specialist
With all of these factors in play, choosing and implementing new lease accounting software can be extremely challenging.
Freed Maxick offers support in all phases of the process, from consultation on software selection to outsourcing of the initial data entry and even ongoing maintenance of your lease portfolio in the system.
To learn more about how we can help you evaluate and select the right lease accounting software, contact Katy Al-Khalidi, CPA at 716.847.2651 for a complementary discussion of your lease accounting situation and a road-map for compliance.
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Understand and consider the different options available as you review your leases, but…
Private entities subject to the Financial Accounting Standards Board’s (FASB’s) new lease accounting standard ASC 842 may get some deadline relief if a recently proposed effective-date extension becomes final, but implementation can still present a significant challenge regardless of the timeline. In order to make the process as smooth as possible, every affected entity should develop a lease accounting transition policy that includes three key things:
- A materiality threshold
- A plan to determine which FASB “practical expedients” will be used, and
- A plan to determine the appropriate application date.
Note that while we recommend setting a transition date and determining which practical expedients you will adopt as you create your policy, the standard does not require that you determine the application date or expedients at the outset. Final decisions on these can be deferred so that information uncovered during the transition period can be considered. It’s important to understand and consider the different options available as you review your leases, but nothing becomes set in stone until the financial reports are issued.
ASC 842 Materiality Threshold
At the outset, management needs to set a threshold for materiality that helps those working on the transition quickly identify which leases need to be reviewed and which are too small to affect the bottom line. This is important, as it will eliminate immaterial contracts from further review and provide valuable time savings.
Practical Expedients for Lease Accounting
In order to help affected businesses with the transition to a new standard, FASB has approved a number of certain implementation shortcuts known as “practical expedients” that are meant to provide transition relief to entities. If your business is working to conform its financial reporting to the new lease accounting rules, you’ll need to review the list of expedients and determine a transition policy that makes sense for your particular circumstances.
Lease Accounting Practical Expedients 1-3: “The Package”
The first three expedients have come to be known as “the package” because an entity can only elect all three of them together or none at all. They are:
- An entity does not need to reassess whether any expired or existing contracts are, or contain a lease.
- For any expired or existing leases, management does not need to reassess its classification in transition if it was correctly classified under the previous standard (ASC 840).
- An entity does not need to reassess initial direct costs for any existing leases.
These three expedients can save a substantial amount of time at implementation. It is important to note that in order to make this election, an entity must have properly identified and recorded leases under ASC 840.
This practical expedient allows entities to combine amounts attributable to lease and non-lease components into a single lease component for evaluation for existing lease agreements at transition. Under the new rules, costs that aren’t attributable to the right to use the asset should be valued and recorded separately from the lease liability. For instance, if a copier lease includes a routine repair and maintenance agreement, that agreement must now be valued and recorded separately from the liability. Entities can elect to continue treatment of these costs under the previous standard for leases in effect at the time of transition.
If a lease is shorter than 12 months at the lease commencement date and does not contain a purchase option that the lessee is reasonably certain to exercise, the reporting entity can elect not to treat it as a right-of-use asset.
FASB’s expedients include the option to classify a lease at transition based on information that was not available when it was created. This can be helpful for businesses evaluating leases that have an option to extend, but there is a potential downside in that some leases may be reclassified from operating to capital.
The rules permit an entity to continue treating existing or expired land easements in the same manner they were accounted for under the previous standard.
An entity must elect one of two modified retrospective approach methods to apply the transition provisions in the standard. Under the two methods, application date would be:
- The later of
- The beginning of the earliest comparative period presented in the financial statements or
- The commencement date of the lease, OR
- The beginning of the period of adoption.
Consider the Users of Your Financial Statements
For most of the non-public entities covered by FASB’s proposed extension, we recommend working with your accounting advisor to determine the path that gets you through the transition with the least complication. However, it’s important to remember that private entities might be dealing with a specific audience when it comes to financial statements. If a bank or stakeholder regularly relies on your financial statements, it is important to consider their requirements while reviewing your financial statements.
Connect with a Freed Maxick Lease Accounting Specialist
Private companies subject to the ASC 842 transition will likely need lease accounting consulting support in order to comply even if FASB’s proposed extension is finalized.
For more information on how the new lease accounting standard could affect your business, contact Katy Al-Khalidi, CPA at 716.847.2651 for a complementary discussion of your situation and a road-map for compliance.View full article
Private companies likely to see delay in deadline for implementing new lease accounting rules.
The Financial Accounting Standards Board (FASB, the Board) has proposed a one-year delay in the effective date of ASU 842 Leases for non-public business entities, as defined in the standard. Affected businesses will be required to report lease transactions under the new rule for fiscal years beginning after December 15, 2020. Public business entities, as defined, are still required to adopt this standard for fiscal years beginning after December 15, 2018.
FASB’s rules require that their proposal be submitted for a 30 day public comment period before it is officially finalized, but no opposition is expected. A one-year delay is consistent with comments submitted previously by the American Institute of Public Accountants (AICPA).
FASB Notes Challenges and Costs of Transition
The Board discussed several challenges caused by rule changes that are magnified when a smaller business attempts to transition to a new standard, such as:
- Limited availability of resources needed to comply with a new rule,
- Limited options for training staff on how to apply the new standard,
- Short turnaround after implementation for large public companies results in limited public disclosure of problem areas and few SEC comment letters, and
- Insufficient lead time to assess software solutions and implement internal controls.
In the case of the lease accounting change, the new requirement that certain lease arrangement be recorded as an asset and corresponding liability has led to a scramble at many businesses to track down documentation of long-standing leases and related amendments.
Once all the documentation is located, the next hurdle is creating a system to manage the process going forward. Depending on the business, there seems to be a tipping point at about 30-40 leases where an in-house spreadsheet becomes unmanageable and a lease management solution from an outside vendor might be a more viable option.
No Time to Relax
The extra time may reduce the pressure on businesses that have been struggling to comply with the new rule, however we strongly advise that implementation is not set aside, but that businesses use this opportunity to continue momentum with reduced stress on your Company personnel.
Most businesses that start the transition process find that it is more complicated and time consuming than they expect. The delay offers a business time to gather the relevant documentation, ask questions about unusual circumstances that may arise, and evaluate software options if needed. A business that simply postpones work on implementation in response to the delay runs the risk of encountering the same problems in a year without any time to implement solutions.
Connect with a Freed Maxick Lease Accounting Specialist
For many private companies, compliance with the upcoming lease accounting standard will be a complex and onerous undertaking. It’s likely that some help will come in the form of a combination of software and advisory services offered by your CPA firm.
The time to start considering an action plan for compliance is now. For more information on how the new lease accounting standard could impact your business, contact Katy DeFilippo at 716.847.2651 for a complementary discussion of your situation and a road-map to compliance.
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