Companies large and small with lease arrangements are preparing to adapt to the new standards for lease accounting compliance. And with a December 15 deadline for attaining FASB ASC 842 compliance looming and year-end commencing after that, businesses need to ready their teams to make the internal changes required.
The new guidelines will bring an estimated $3 trillion in liabilities onto the balance sheet, according to International Accounting Standards Board, with the big shift being the inclusion of right-of-use assets for operating leases in addition to finance leases. These ROU assets represent items, property or equipment that can be used by the lease holder for a defined length of time.
Operating leases can no longer reside in the footnotes, and teams will need ASC 842 transition guidance in order to cope with all the additional disclosures enhancing the transparency in the company’s leasing obligations.
The challenges of ASC 842 transition methods
Simply knowing what the ASC is and being able to list the new accounting compliance standards isn’t enough. Accounting teams will need to have a transition plan in place so they can be sure they’re staying ASC 842-compliant after the deadline. Identify leases, extract data, input data into a lease accounting system, and test the system under the standard’s rules: These are just a few of the processes teams will have to learn and perfect.
To start, the record-keeping that teams will have to perform is obfuscated with dense detail. A great many more arrangements are being considered as leases, and transactions that didn’t previously register as leases now have to be found and properly recorded under the new lease standard.
This standard and related disclosures are not discretionary — they’re mandatory. There’s no way around the need for very good internal data practices. This means that companies are having to invest and train in better systems and processes, which can feel like going back to school.
How to help your team make their ASC 842 transition
Even if the “what” of the new lease accounting standards is old news to you, the “how” of lease ASC 842 implementation is another matter. Here are some strategies to help your team transition smoothly to the new standards.
1. Create a steering committee
Doing the groundwork to prepare your team to start their ASC 842 transition is as important as the transition itself. Set up your team by assigning a committee responsible for monitoring implementation and its success.
When creating your committee, don’t just stick to the accounting team. Diversify your approach with representatives from departments including financial planning, real estate, legal, IT and supply chain.
You’ll need representatives from these departments because they all have different roles to play with contracts and can make sure your process for logging and disclosing leases makes sense for everyone. Department representatives will help not only in ensuring a contract meets the requirements of a lease, but also in laying the groundwork for your organization’s ASC 842 compliance roadmap after implementation.
2. Build your roadmap
You’ll need a plan for documenting and managing all these new lease arrangements in your accounting routine. The compilation of leases may require a new, centralized location where data is stored. In fact, 57% of the attendees at Deloitte’s accounting and financial reporting symposium reported that collecting data on all their organizations’ leases and compiling them in a centralized inventory was their biggest challenge during their ASC 842 transition.
This data may be quite complex, refer to multiple stakeholders, or be resident across different management systems. To make an effective plan, all this information has to be brought together and made readable for all the various departments that need to access it. The job of organizing and abstracting leases is complex, and you’ll need to know exactly what you’re doing before you begin.
3. Get the best set of resources you can
Becoming compliant with these new lease accounting standards may require a significant lift of internal work and reorganization. You’ll need to evaluate your workplace and assess whether you have the internal horsepower available for making this shift. Otherwise, external resources are available.
Consultants can help you see the forest for the trees and have the benefit of experience that can keep you from making costly mistakes. And lease accounting software is another tool that can just ease the burden of ASC 842 compliance so you can sleep a little easier.
The holidays are coming up, and so is the deadline for becoming ASC 842-compliant. Make sure your team is ready to make the jump, and get the support you need to remove confusion from the equation.
