The time to implement ASC 842 for private entities is fast running out, the standard was effective January 1, 2022. (Fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022). Private companies should therefore implement the new lease standard as soon as possible so that they are compliant with US GAAP. They can learn from the mistakes of public companies and apply proven best practices to avoid similar mistakes.
Implementing the standard is a complex, time consuming process and maybe resource-intensive. Companies must not underestimate the time and costs involved. Even early adopters have found the work required far exceeds their expectations.
The first step is to gather all lease agreements and contracts. Once this is complete, companies should develop a process to perform a detailed analysis of the leases and other service contracts and arrangements that may have imbedded leases. Such analysis should be properly detailed and documented. This may be a time-consuming and requires extensive resources. Managing the lease accounting process effectively will also require extensive knowledge of various lease terms. Furthermore, it may affect KPIs, strategic planning efforts, and debt covenants.
Companies with more than ten leases should consider using a lease software solution to streamline the process. Lease accounting software can make this process easier.
Implementing ASC 842 is a time consuming process, requiring a cross-functional approach. One of the biggest challenges is identifying all lease arrangements including imbedded leases and procuring complete lease documentation. Identifying imbedded leases is a time-consuming process that could delay the adoption of ASC 842. To overcome these and other issues, companies should align with their auditors early and consider implementing new lease accounting software where there are many leases as soon as possible. While the new standard is designed to bring most operating leases onto the balance sheet, it also significantly changes the definition of a traditional lease.
Public companies, some which faced delays and problems implementing the new lease accounting technology solutions provide a good case study to private entities. Companies could be forced to make extensive changes to their processes and systems in order to implement the new standard. There are also areas where management judgement and accounting estimates maybe required.
From our experience implementing ASC 842 standard at public companies, there are instances of leases occurring in arrangements that traditionally are not treated as leases for under ASC 840- you may see leases are everywhere- in the break room, board room airport etc. In addition to real estate, businesses use equipment and machinery for their business, which may affect the accounting treatment of leases. Likewise service contracts for IT and operations may have imbedded leases that maybe impacted by ASC 842 standard. As they say, the devil is in the details and as such ASC 842 implementation requires a thorough review of existing assets and contracts, and analyzing the data to ensure consistency and appropriate implementation.
Thanks to feedback from the implementation by public companies, ASC 842 has recently been amended to make its implementation process easier for smaller/private companies.
One of the major changes is the use of a risk-free rate. This method reduces the implementation costs for smaller companies by eliminating the burden of determining the rate per lease, calculating minimum lease payments, and updating it.
To ensure successful implementation, companies should take stock of their timeline and prepare ahead of time. In addition, they should follow the best practices of companies that have successfully implemented ASC 842 Leases.
At Princeton Business Consulting, we assist private companies implement of ASC 842 by searching service contracts for imbedded leases, lease analysis, developing ASC 842 journal entries, drafting lease disclosure footnotes and writing ASC 842 memos and white papers.
