Companies that waited until the last minute to comply with the latest lease accounting standard, ASC 842, the latest leasing standard issued by the Financial Accounting Standards Board (FASB), are in for a scramble. The purpose of this latest standard is to bring most operating leases, which could previously be accounted for off-balance sheet, onto the balance sheet. FASB passed on offering a delay for private companies and specific not-for-profit organizations on November 10th, giving any company that had been twiddling their thumbs on the matter less than two months to comply. Public companies were already required to follow the new standard as of January 1st, 2019, but the deadline for private and not-for-profit companies had been subsequently extended. Even though this is old news, the ASC 842 has been on the radar since its first announcement in 2016. Still, there are reports that many companies in the private sector are failing to realize the magnitude of this undertaking.
Enron’s financial fallout has been said to have prompted ASC 824’s inception, but the fact of the matter is that too many companies were taking advantage of off-balance-sheet financing to display an inaccurate picture of their financial reality (WorldCom, Lehman Brothers, and Adelphia Communications just to name a few). ASC 842 effectively closed the loophole that allowed companies to disguise certain liabilities and assets from their balance sheets. “By closing the loophole, ASC 842 increases financial transparency and comparability among organizations that enter into lease agreements and provides a more defined picture of an entity’s leasing obligations including amounts, timing, and uncertainty of cash flows,” said Baker Tilly.
Under the new standard, companies may only omit short-term leases that span less than 12 months from their financial statements. The International Accounting Standards Board will also allow an exemption from capitalization for leases valued up to $5000.
But that’s where the simplicity ends. “ASC 842 actually changes the very definition of a lease,” says CPA Moshe Freedman. “It’s likely to catch many CFOs, controllers, and even auditors off-guard. Leases are oftentimes central to an organization’s operations, and compliance with the new standard equals more complexity and more internal efforts. It’s easier said than done.”
Hurry up and wait
ASC 824 had initially been set to apply to all companies simultaneously, but the Financial Accounting Standards Board (FASB) voted unanimously to defer the standard for the private sector. Reasons cited for the delay included logistical snags that public companies ran into when implementing the new standard.
But that rationale isn’t out of the ordinary in the accounting world. “There’s a reason public companies go first,” said CPA Lisa Kaestle. “There are lessons to be learned by companies, their auditors and consultants, and software providers. Private companies should look at public company disclosures to see what accounting expedients the majority of public companies have already taken.” Whatever the case, private companies were given an extra year to get their files in order.
Then the pandemic came and turned everything upside-down. It’s doubtful that companies were busy with the meticulous cataloging of leases as assets and liabilities when most of them were shut down due to the pandemic. The transition operation alone is a huge task as compliance requires full-time equivalent processes.
Economic impacts such as reduced revenue, market volatility, business and production disruptions, and supply chain interruptions were referenced in a plea from the American Institute of Certified Public Accountants to FASB to extend the second deadline. FASB board members heeded AICPA’s appeal and voted to extend the deadline yet again in June of 2020. Private companies and private not-for-profits could heave a sigh of relief; they had another year to prepare.
Even after two extra years to get it together, 75 percent of private organizations surveyed have yet to be fully compliant with the ASC 824 accounting standard. The lack of preparedness is astonishing considering that the new standard was a long time coming. Though many said that their processes had been delayed because of COVID-19 (the same excuse given the year prior), many had argued that they hadn’t been able to gather all of the necessary lease data yet, that they’re still learning about the new processes, or that they don’t have the technology or resources in place. Overall, it’s taking them more time than expected.
Private companies who have not prioritized ASC 824 are in for a rude awakening. Stakes for lease accounting are high since failing to comply with the FASB can result in increased audit costs, financial restatements, decreased investor confidence, and even job loss. Yes, it’s a big workload. But there’s an undeniable economic advantage when there’s more transparency on your books. Fifty-four percent of respondents who were up-to-date on their lease accounting said that they could pinpoint areas of cost-savings when all the lease data had been organized to the ASC 824 standard.
Fully understanding the ins and outs of ASC 824 can be frustrating, to say the least, which might be why so many companies haven’t placed implementing it at the top of their to-do list. Whatever the case, if you’re a company that hasn’t filed yet, yesterday was the right time to get your paperwork in order. If you missed that deadline, now might be good enough.