Katy Al-Khalidi, CPA
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.