Accounting Standards Update No. 2016-02, Leases (Topic 842) was first introduced in February 2016. For most public companies, adoption of the standard began with an effective date after December 15, 2018. For the remainder of companies that are considered to be in the “all other category”, including private entities, ASU No. 2016-02 would be effective beginning December 15, 2019 and interim periods beginning after December 15, 2020.
With the worldwide impacts of the coronavirus, the Financial Accounting Standards Board (FASB) released a limited deferral of the effective dates for the Standard on June 5, 2020. For public entities and not-for-profits who have not already issued financial statements, the effective date concerning ASC 842 was deferred to reporting fiscal years beginning after December 15, 2019, including those with interim periods. Private companies benefit most from the deferral as ASC 842 can now be deferred until fiscal years beginning after December 15, 2021 and interim periods beginning after December 15, 2022.
While this provides companies that have not implemented ASC 842 additional time to be compliant, many of them will use this time to kick the can further down the road. Procrastination and inadequate planning for ASC 842 will only drive up the cost and stress put on these companies. How do you achieve compliance with ASC 842 and what are the biggest challenges and solutions easily? Read our blog post to find out.
FASB and ASC 842: The challenges
All companies that have not yet gone through the process to implement the lease standard ASC 842 should use the additional time provided by the FASB to their advantage. Companies should leverage lessons learned from those that have already adopted ASC 842. One reoccurring theme surrounding the adoption of the new standard: the challenges are underestimated, as it is often more time-consuming and difficult than initially expected.
ASC 842 challenge 1: Embedded leases and lease data
Most companies, especially smaller private companies, do not have a system in place to track and manage their leases. Lease data is often not readily available and decentralized within an organization. Collecting a complete data population for leases and embedded leases is often a challenging and very time intensive task. Knowing and being able to pay the monthly payment is just the tip of the iceberg.
Once you are sure you have a complete population of leases, the leases (one by one) must be analyzed in detail to extract all the necessary data needed to correctly account for the lease under the new standard. The data collected for the standard can vary based on the complexity of the lease contract. Some of the data is subjective and may require additional information outside of the contract, or within multiple amended contracts. Overall, it can be challenging for entities who maintain legacy systems or hard copies of lease data.
ASC 842 challenge 2: The coronavirus and ASC 842
The continued impacts of the coronavirus will only adds to the complexity challenges of becoming compliant with the lease standard ASC 842 for both the lessee and lessor. As the world adapts, companies will need to account for and adequately report rent concessions, forgiveness, or any other deferrals that were made as a result of the economic impact of the coronavirus. Companies will need to evaluate business interruptions due to the pandemic and apply any lease modifications as well.
The benefits of an ASC 842 solution
To eliminate these challenges, Companies companies need a solution to assist them with implementing and maintaining compliance with ASC 842. Using spreadsheets to track leases is a start but becomes unreliable quickly as new leases are added and changes to leases or formulas are made. A solution that can adapt to change and handle a large set of data is needed to prevent future headaches.
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