One positive outcome from the fallout of the global pandemic COVID-19 was the Financial Accounting Standards Board (FASB) decision to delay Accounting Standard Codification (ASC) 842, Leases, for privately held companies and nonprofit organizations. With the deferral, private companies are now required to adopt for annual financial reporting periods beginning after December 15, 2021, which is 2022 for calendar year-end companies. Early adoption is permitted and this standard only applies to those companies reporting under US GAAP (it does not apply to the income tax basis of accounting).
The current lease standard (ASC 840) has not changed in over 30 years. ASC 842 will potentially affect every company holding leases as it is designed to account for a Company’s lease obligations on the balance sheet as a right-of-use asset and lease liability. With the deferral from FASB, companies have been provided additional time to properly prepare for the implementation to achieve success.
Over the next few months, we will be diving into the implementation process. Below is a breakdown of implementation considerations.
- Lease tracking solution (Excel vs. lease software)
- Resources needed to implement and maintain
- Identifying the lease portfolio
- Evaluating the lease agreements and overall scope
- Calculating the lease obligations and right of use assets
- Financial reporting and disclosures
- Internal control processes moving forward
Lease Tracking Solutions
Consideration of the method in which to track and calculate lease obligations should be given serious thought. Companies need to decide the best solution, i.e., manual Excel spreadsheet or lease accounting software. Consider the following:
- How many leases need to be tracked?
- What the complexity of payment terms (sales-based payments, step-up rents, non-lease components, etc.)?
- What is the frequency of changes made to the lease agreement (i.e., free rent, amendments, renewals)?
- How elaborate of a software solution is needed? Do you need a GAAP compliance tool or an enterprise lease administration system? Below are key differences:
- Automation of the lease payment process
- Interfacing with a general ledger system to book journal entries
- Creation of lease abstracts
- Central depository for your lease agreements
- Notification of critical dates to avoid missing renewals or changes in terms
- Analyzing the real estate market and related metrics
- Risk of human error – it is likely going to happen, but will you catch it in an Excel file?
- Automated versus manual financial reporting and disclosures
If you have decided to use Excel for tracking your leases, it will be important to develop an approach that treats each lease agreement consistently to ease financial reporting requirements and journal entry making each month. It is also essential to have the correct formulas in place and limited accessibility to the file to avoid any unexpected changes by other users.
If you have decided to utilize lease accounting software, you will need ample time to configure the lease accounting software and be trained on using it. There are a lot of inputs to consider, including how it impacts the end result. It cannot be understated to give yourself ample time for proper configuration and training. GBQ has decided to utilize LeaseCrunch for its lease accounting services. If you would like to learn more about LeaseCrunch, consider the following webinar to learn more.
A methodical approach that is well planned out will save you and your team time and frustration. Take the time to evaluate whether Excel or a lease accounting software system is the right solution for you. Excel can be a viable solution if you have a low count and straightforward leases; however, any recurring complexities and a large volume of leases should consider the use of lease accounting software.
If you would like to talk through that decision, your GBQ team is here for you.
Article written by:
Kristen Romaker, CPA
Manager, Assurance & Business Advisory Services