Private market prepares to adopt new lease accounting rules: Lessons learned from public companies

This article originally appeared here in Forbes.

As a result of Covid-19 and the changing landscape related to leases, private companies have received more time to prepare for and adopt the new lease accounting standards in their financial reporting. Last year, the Financial Accounting Standards Board (FASB) further delayed the deadline for private companies to comply with the lease accounting standard ASC 842, which brings most of a company’s operating leases onto its balance sheet. This delay has given private companies nearly two additional years to comply with the new lease accounting standard. Because public companies have already gone through this process, there are many lessons that can be derived from their journey to help private companies as they move through their own adoption.

Perhaps the biggest lesson learned from public companies, which we’ve seen through our clients’ experiences, is that adopting the new lease accounting standard takes time, can be quite complex and results in a resource-consuming process, particularly if there is a lack of cross-departmental collaboration. With the ASC 842 deadline for private companies looming, there are several things private organizations can do to set themselves up for success.

Know What Lease Data To Gather And Where To Get It

Public companies learned that gathering and validating data was the most challenging part of the lease accounting compliance journey. Companies with large, diverse lease portfolios found lease contracts — and thus the data within those documents — can be scattered across any number of separate sources. Not only is it tedious to gather contracts and relevant data, but it’s also easy to overlook required information if the individuals abstracting the data don’t have an informed sense of what is required for compliance. Failure to properly capture all the relevant data elements can ultimately diminish the value of a company’s financial reporting. Due to this important — and heavy — lift, and despite the deadline delay, getting an early start is key to a private company’s successful adoption.

It’s worth noting that not all required data elements for effective lease accounting compliance will be found within an organization’s lease agreements. In some cases, only about half of the data will be found within contracts, while the remainder will be contained in other sources and require some level of judgment to establish.

When private companies begin down the road to lease accounting compliance, they should first reflect on what the required data is and where it can be found within their organization. These answers can be overwhelming, but in this case, knowledge is power. This is because there can be as many as 70 distinct data elements, such as lease terms, payment schedules, end-of-term options and incentives, that need to be identified and captured to be compliant with the lease accounting standards. To properly collect, organize and analyze all the required data, private companies should get ahead of the process and start to prepare now.

Use A Centralized Data Repository

Another lesson learned from public companies is the importance of a central lease document and data repository. A 2016 survey by PwC found that 39% of companies manage their lease agreements and related accounting in a decentralized manner. While this approach can work for some, it’s time-consuming and can increase the chance of human error during the data collection process. Public companies that had an organized centralized lease portfolio learned that it saved them time on gathering and analyzing required information, which ultimately saved them money in the long run.

When setting up a centralized lease portfolio, public companies were able to streamline and optimize global reporting processes and track lease data in real time, which has proven benefits for lease accounting compliance. By having all of the necessary lease data at their fingertips, these organizations experienced a faster, more efficient lease compliance process while also uncovering cost savings including overpayments, unreceived lease incentives and reduced full-time equivalent costs, among others. Not to mention, centralizing leases can be instrumental in supporting a company’s audit process.

Put Dedicated Teams In Place

Public companies have also seen the value of having the right people in place:

• Cross-departmental collaboration: Working with other internal teams on data collection creates visibility across an organization, streamlining the process and positioning the accounting team as a stronger partner to their business.
• IT assistance: When opting to leverage a centralized data repository or any other dedicated technology, it is critical to enlist one’s IT department from the outset of the project to ensure a smooth implementation, particularly as it relates to the eventual integration with other systems such as an ERP.
• Dedicated players: Bringing in experienced lease accounting, project management and other expert professionals — whether they’re in-house or outside service providers — can minimize the impact on a company’s other resources.

While every organization’s lease accounting compliance journey is different, many public companies discovered that some of the most daunting tasks with the new leasing standards were only tangentially related to accounting. Rather, the most significant challenges were in the preparation process. Once private companies get their leases in order and dedicate the time and resources required, they are positioned to better achieve compliance and drive a positive impact on their business’s financial reporting and compliance.