The revised deadline for implementing the new lease accounting standards (ASC 842) for private companies is fast approaching.
Private companies are required to adopt the new lease accounting standards for financial reporting periods beginning on or after December 15, 2021. ASC 842 requires lessees to carry most leases on their balance sheet as right-of-use (ROU) assets with related lease liabilities.
Complying with the new lease accounting standards
Adhering to the new lease accounting standards may require a detail review of your company’s lease agreements and other contracts, which may contain lease components. Gathering and reviewing the contracts to ensure completeness of lease accounting may require significant effort and time – not only by your company’s accounting personnel, but personnel from other departments, too. You may require assistance from employees in procurement, security and maintenance, transportation, information technology and legal, to name a few. Depending on whether your operations, administration and company management are centralized or decentralized as well as domestic or foreign, you may need to establish appropriate, adequate policies and procedures to gather and analyze lease related information.
As public companies were required to implement the standards for reporting periods on or after December 15, 2018, private companies have the advantage of learning from public companies’ implementation experiences. One of several lessons learned was that it is never too early to start the implementation process. Implementing ASC 842 often takes longer than expected, due to various factors including:
- It requires more than the estimated time to gather, analyze and summarize the lease information, such as verbal agreements, to establish “completeness.” i.e., a comprehensive list of all the ROU assets.
- There is often a lack of available internal resources with the knowledge and ability to dedicate the time necessary to effectively implement ASC 842.
- There are several intricacies involved in the assessment and selection of an appropriate lease accounting software and other tools, which vary depending on the volume and complexity of the contracts and the lease portfolio.
We advise business owners to partner with an organization equipped to help simplify the transition from the existing lease accounting standards (ASC 840) to the new lease accounting standards within a realistic timeline and budget. A professional can help by:
- Assisting management with formulating an implementation plan.
- Scoping the project, including discussions about policy elections and practical expedients.
- Reviewing contracts and abstracting relevant information.
- Evaluating lease accounting software.
- Executing deliverables such as lease amortization tables, monthly journal entries and financial statement disclosures.
- Documenting lease accounting policy memos and offering guidance on appropriate procedures for compliance with the new lease accounting standards.
Learn about Sikich’s capabilities in implementing the new lease accounting standards by contacting our team today.