Companies make progress on lease accounting

Slowly but surely, more private businesses are adopting the new lease accounting standard as they face demands to put their operating leases on their balance sheets for the first time.

The Financial Accounting Standards Board's ASC 842 standard took effect for private companies last year after the original effective date was delayed to help companies deal with the pandemic. FASB issued the standard in 2016, and it took effect for public companies in 2019. But private companies have been slow to adopt it, though now they're facing crunch time when it comes to providing their financial statements to lenders and business partners for the fiscal year ending Dec. 31, 2022.

"For private companies with calendar year ends, this is the first time from an audit perspective they're going through the 842 adoption," said Kirk Rogers, a partner with Top 10 Firm RSM US in McLean, Virginia. "What we're seeing is we have clients who are absolutely prepared and ready for it, and we have clients who have smaller portfolios of leases where they're kind of getting to the end of the year and realizing they've got to catch up."

Lease contract, close-up

Companies that have put off implementing the standard find they have to start adopting it ASAP.

"There's no more deferral," said Anthony Placencio, a partner at RSM US in the Dallas-Fort Worth area. "It's effective as of Jan. 1 for calendar years. There have been lots of discussions and working toward this, and we're at the point now where lots of clients are sitting here trying to execute and get this thing done here in the very near term."

Government accountants are also dealing with new lease accounting standards. The Governmental Accounting Standards Board's GASB 87 lease accounting standard took effect in July 2021, but for state and local governments with June 30 fiscal year ends, they had to start applying it in 2022.

The Federal Accounting Standards Advisory Board has also been proposing some changes in its lease accounting standards for the federal government in recent years (see story). Last week, it issued a technical bulletin on how to account for intragovernmental leasehold reimbursable work arrangements in which a lessor acquires, constructs, improves or alters an underlying asset that will be leased to a customer and the lessee agrees to reimburse the provider for the direct and indirect costs of the acquisition, construction, improvement or alteration. 

Unfamiliar territory

Most accountants will be dealing with lease accounting at their own businesses or those of their clients. The new standard comes on the heels of FASB's earlier revenue recognition standard, another major standard it issued in 2014 as part of its convergence project with the International Accounting Standards Board, which also required a great deal of adjustment and a long transition period.

"One thing that our clients are quickly finding is that unlike the revenue standard, ASC 606 or other standards, the adoption of 842 is resulting in a journal entry they have to make and a calculation they have to do," said Rogers. "That's new to them."

Accountants who try to use familiar tools like Microsoft Excel are finding they may need to turn to specialized lease accounting software, especially if there are more than a few leases to account for under the new standard, such as "embedded leases" that may not initially be seen as leases. 

"They're finding it's tough to implement the standard using Excel because aggregating the information, the footnote disclosures and journal entries is really not a sustainable process on a go-forward basis," said Rogers. "So we're seeing a lot of clients respond to that."

RSM is hearing from more clients who need help applying the new standard this year. "It's definitely been a big uptick here recently," said Placencio. "That's probably the biggest wave that's hitting everybody's radar now — it's time to go."

The firm has assisted clients who have anywhere from a single lease or two up to as many as 60,000 leases, according to Rogers. "As a service provider to middle-market clients, we've also had to step back and see how we help clients with smaller portfolios," he said, noting that RSM developed its own software product focused on small lease portfolios called 842 Express to meet this need. 

FASB recently decided to tweak the ASC 842 standard to deal with leases under common control, but it only applies to a subset of companies, mostly when there are related-party arrangements between entities under their common control (see story).

"Clearly it helped, but it helped a limited group of middle-market companies," said Rogers. "It didn't help a conventional middle-market company that has a fleet of leased cars with Enterprise. It helped in certain unique situations, but for the vast majority of our clients who don't have those common control situations, it didn't help them. Any relief is helpful, but it still didn't dramatically change the lift that clients are having to do."

Clients will need to keep track of their leases going forward after they finish implementing the new standard. "We're probably at the point where many of our clients — once they get the implementation down — are starting to think about Day Two," said Placencio. "Many times clients just ran out of time to get a software solution where they'd have a nice dashboard for tracking day to day. They just had to get the entries to make sure they were getting the audit report done."

Some companies have decided to buy rather than lease products, but inflation has made that a more expensive option.

"There have been examples where clients said, 'I'll take care of the standard. I'll just buy all my equipment.' We have seen that but a lot of middle-market companies don't necessarily have that capital available to just make that decision," said Rogers. "But we have seen where that was the solution where they just won't use leasing as a financing method."

Clients are realizing that implementing the new lease accounting standard is not as simple as they might have thought.

"Managing your leases is not as easy as managing your fixed asset subledger, but it's not as hard as implementing an ERP," said Rogers. "As we help clients in the middle market focus on putting the right resources to the adoption and managing it, they're realizing that it's a little heavier lift than they anticipated. As much as we warn them and have educated them — we held multiple classes and continuing education events for our clients where we outlined all these things — what we're seeing now is they're experiencing it and now have a greater appreciation for what it takes to adopt the standard."

The standard is having a wide-ranging impact on many companies' balance sheets as well as their overall workload.

"The impact of the lease standard was huge," said Placencio. "It wasn't a specific industry. It was something that typically your lenders or the users of financial statements could get there with the operating lease disclosures. They were aware of it. But it was a huge lift, and it's really hard to get it right the first time. From an ongoing perspective and focusing on all of the Day Two aspects, that's going to be a challenge, making sure they have the right processes and controls in place to make that easy. The resources are probably the biggest thing where everybody is struggling from a labor standpoint. There are really no shortcuts with the new lease standard. It's rolling up your sleeves, and you have to get into it on a lease-by-lease level."

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Accounting Accounting standards FASB RSM Financial reporting
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