We will be continuing our series on implementing the new lease standard. As a reminder, the Financial Accounting Standards Board (FASB) delayed 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.

The current lease standard (ASC 840) has not changed in over 30 years. ASC 842 will potentially affect every restaurant 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 a lease liability.

We continue the series by discussing needed resources and the identification of the lease portfolio. Below is a more comprehensive breakdown of implementation considerations and related articles.

  1. Lease tracking solution (Excel vs. lease software)
  2. Resources needed to implement and maintain
  3. Identifying the lease portfolio
  4. Evaluating the lease agreements and overall scope
  5. Calculating the lease obligations and right of use assets
  6. Financial reporting and disclosures
  7. Internal control processes moving forward

Resources Needed to Implement and Maintain
Building the proper team is important in any implementation. Appropriate team members should also include personnel to maintain the outcomes from the implementation process. Below are considerations when identifying resources needed for successful execution.

  1. Determine whether technical expertise on ASC 842 exists in-house or if third party assistance is needed (e.g., consultant)
  2. Review existing leasing business processes
    • Entering leases
    • Legal review of lease contracts/negotiations
    • Document retention
    • Compliance calculations
    • Lease payments including percentage rent
    • Monitoring of lease critical dates (e.g., renewal terms)
  3. Interview who is responsible for leases including accounting and decision-makers
  4. Include impacted department representatives (i.e. Accounting, Legal, Procurement, Treasury, Management)
  5. Determine if a consultant is needed if other company personnel does not have time to champion the process
  6. Decide if lease processing is centralized or decentralized and review best practices

Once a well-rounded team is established, the group can share in the responsibilities to develop a rollout plan to tackle the more difficult decisions including identifying the existing lease portfolio.

Identifying the Lease Portfolio
The bulk of the work effort and potentially the most challenging part of the implementation process is identifying the lease portfolio.

In order to qualify as a lease, these three conditions must exist:

  1. An identified asset exists;
  2. The lessee has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use; and
  3. The lessee has the right to direct how and for what purpose the identified asset is used throughout the period of use

Below are tips to ease this process:

  • Consider all locations for completeness
  • Review recurring expenses for lease payments and for keywords (i.e. rent, lease, subscription)
  • Examine all types of leases. Real estate, vehicles, and kitchen equipment are expected; however, there are many more leases to consider such as the following:

 

  Vending Machines   Parking Lots   Storage Units
Ice Machines ATM Drink Dispenser
  Copiers   Security Cameras   Headsets
Satellite Dishes POS terminals Generators
  Trailers   Kiosks   Dumpsters
Phone Systems Laptops Billboards

 

  • Consider service contracts that may include embedded leases (e.g. A service provider using equipment to deliver wi-fi. The equipment used could qualify.)
  • Ask your CPA and business advisors for existing tracking mechanisms
  • Exclude leases that do not fall under the lease standard (i.e. short-term leases (less than 12 months or month to month), SAAS software, biological assets, minerals, inventory, assets under construction, low-dollar leases)
  • Apply a materiality threshold that still allows your financial statements to be materially correct while also streamlining the lease accounting process

Planning is such an important part of the implementation process. Making decisions early can alleviate confusion and frustration for all involved. Reaching out to a professional such as a CPA or consultant can lighten the load and allow management to focus on its core operations.

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

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