October 17, 2019
The FASB Lease Accounting Standard Delay – What Does It Mean?
Posted by John Dunican
The Financial Accounting Standards Board recently approved a one-year delay in the adoption date of the new lease accounting standard (Accounting Standards Update 842 – Leases) for private companies and not-for-profit organizations. The implications of that delay vary significantly depending on each entity’s operations and reporting requirements.
Although FASB has deferred the private company adoption by a year until fiscal years beginning after December 15, 2020, the International Accounting Standards Board has not proposed any delays to its new lease accounting standard, International Financial Reporting Standards 16. That standard will still become effective for private companies for fiscal years beginning after December 15, 2020. Public companies were required to comply with the leasing standard for fiscal years beginning after December 15, 2018, and any companies seeking to go public will need to comply with the new standard in advance of filing for an initial public offering.
As a result, any private company with international operations and reporting obligations under IFRS must be ready to adopt IFRS 16 under the standard’s original timeline. This, in turn, means that any company that needs to adopt the IFRS lease accounting standard should continue its implementation efforts and would benefit significantly by adopting the IFRS standard while early-adopting the FASB standard at the same time.
The Standards’ Intent
Both ASC 842 and IFRS 16, the most significant changes to lease accounting in 30 years, were developed with the goal of bringing operating leases onto companies’ balance sheets for the first time.
Instead of treating leases as off-balance sheet financing, the standards provide a more faithful representation of a lessee’s rights and obligations by requiring companies to record operating and finance lease payments as liabilities that are offset on the balance sheet by right-of-use assets.
Implementing the standard, though, has proven to be more complex than many entities anticipated. For instance, a number of public companies, which were required to adopt the standard at the beginning of 2019, underestimated the effort, manpower and technology needed to implement the new accounting rules.
In part because leases were often decentralized across a company, identifying how many leases a company had entered into was often a challenging exercise.
Because public companies reported difficulty in meeting the new standard’s obligations, including post-adoption data tracking, the FASB decided to provide private companies with another year to implement the standard (as well as standards on current expected credit losses and hedging).
The best course of action for private companies to take in response to the delay depends in part on whether they have international operations and IFRS reporting obligations. If a company does, it’s critical for the company to continue its implementation efforts for the IFRS and FASB lease standards.
If you have to comply with IFRS, there are people, process and technology-related benefits to adopting both standards at the same time.
From a people standpoint, adopting the standard will involve considerable time and effort from your internal, and potentially external, resources. Those people won’t want to duplicate their efforts by adopting the lease standards separately and combining your efforts to adopt both standards at once will be less expensive.
Similarly, from a process standpoint, you want to reduce the duplication of effort. It’s important to understand that adopting the standard is merely the first step. Once the standard is adopted, you’ll have to operationalize processes for meeting the standard’s ongoing reporting obligations.
This will mean tracking current lease payments and the net present value of upcoming obligations, as well as new and expiring leases. It’s far more efficient and cost-effective to develop a unified process that encompasses ASC 842 and IFRS 16 rather than deferring your implementation efforts for the FASB standard.
From a technology standpoint, it’s important to realize the complexity of collecting and valuing lease-related data makes manual tracking or relying on spreadsheets impractical. Specialized leasing software is available to automate the tracking and calculations, and to share leasing data with your general ledger or ERP platform. Now is the time to compare potential software systems to determine if a solution can help you meet your tracking and reporting obligations.
If you’re a private company without IFRS lease reporting obligations, it’s important to take advantage of the extra year and to maintain the momentum of your current implementation efforts.
If you have devoted time and resources to getting ready for the standard, you’ll want to continue with that process with an eye toward early adoption. There’s little benefit to delaying your implementation efforts and continuing now can provide additional time if you encounter unexpected issues later in the process.
Companies that haven’t started their implementation efforts, or remain in the earliest stages, are likely behind the adoption curve (even with the extra year). As public companies experienced, implementing the standard is a complex, resource-intensive exercise that requires significant time and effort.
Important early steps that should be underway now include determining the internal and external resources you’ll likely need to identify your company’s existing leases and technology needs.
Additional steps will include:
- Collaborating across business units to identify existing leases and their terms
- Reviewing service contracts for embedded or implied leases (as defined in the standards)
- Creating or updating a complete lease inventory
- Identifying any data gaps, such as the market value of a leased asset or the discount rate used in the lease’s valuation
- Evaluating software to support lease tracking and reporting requirements
- Working with external auditors, investors and banks to discuss the implications of the new standard.
Given the complexity of the lease accounting standards, it’s important to continue your implementation efforts to meet the required implementation deadlines and to operationalize an effective post-adoption lease management, accounting and reporting process.
John Dunican is a Partner and Head of CFO Advisory Services for Armanino, with more than 30 years of financial, operations and consulting experience with public and private companies. Prior to joining Armanino, John served in CFO and Vice President of FP&A roles. He has extensive management, financial and operational experience in the technology, manufacturing and distribution industries. His professional background includes expertise in all financial functions, process re-engineering, information systems, SEC and investor reporting, mergers and acquisitions, divestitures and cost-reduction programs.