In an act of relief for companies during the coronavirus pandemic, the Financial Accounting Standards Board (FASB) recently voted to propose a one-year deferral of major accounting standards, including ASC 842 (Leases). This proposal would allow private companies an additional year, on top of the initial delay that went into effect October 2019, to adopt the lease accounting standard in their financial statements. Public not-for-profit companies who have not yet issued financial statements would also be granted an extension.
In light of the coronavirus outbreak and its impact on the global financial market, we support FASB’s decision to defer compliance for this additional year. Organizations are reeling from the impact of COVID-19, and this deferral would relieve pressure regarding ASC 842 compliance and give them time to focus on the operational and financial challenges posed by the crisis.
COVID-19 Has Exposed Inadequate Lease Controls
Delaying the compliance deadline will also give organizations needed time to pull together the information needed to meet ASC 842 as well as provide them with much-needed control over their lease obligations. COVID-19 has brought to light significant inadequacies of existing controls surrounding lease agreements. In an effort to find liquidity and reduce expenses, companies have been examining their leases to understand their options. What they are finding is that they cannot get clear-cut answers about their rights and obligations. How their leases address defaults, terminations, options, rent abatements and other issues can make a huge difference in how companies pivot in this environment.
Extra Time Is Needed to Gather Information
If the ASC 842 deadline is pushed out, companies should take advantage of the extra time to collect, organize and summarize their lease information as well as schedule out their rental obligations. Figuring out lease rights and obligations across a real estate or equipment portfolio is incredibly time-consuming, and is best done when resources are available. Public companies had a difficult time gathering needed lease information as their ASC 842 deadline approached at the end of 2018, and had to rely on expensive consulting firms to get it done. In fact, the difficulty public companies experienced was the primary reason FASB decided to push the deadline last October. Private companies, who have fewer resources and smaller budgets, should take heed and avoid that trouble.
Tighter Lease Controls Provide Liquidity and a Strong ROI
Furthermore, organizing leases now will give them earlier control and reduce costs along the way. Especially for companies utilizing lease management software solutions like Visual Lease, adopting tighter lease controls has an exceptional ROI. Through tight management of leases, customers are able to avoid costly penalties, act in time to exercise options, prevent rent overpayments, aggregate and refinance leases and optimize their portfolios. As we have seen over the years, given the expensive nature of real estate and equipment leases, any one of these benefits can save thousands to millions of dollars.
Compliance with ASC 842 is no small undertaking, and continued action and momentum towards compliance is best practice. Our recommendation is to not look at a deadline deferral as another reason to push the work further down the road. Instead, companies should work diligently, taking advantage of the additional time to gather their lease information, better manage their portfolio and reduce costs.
