This article, "Private companies continue to delay lease accounting implementation," originally appeared on AccountingToday.com.
Privately held companies are putting off implementation of the new lease accounting standard, even as the effective date approaches.
Last year, in response to the pandemic, the Financial Accounting Standards Board delayed the effective date for the leases standard for nonpublic entities until Dec. 15, 2021, after postponing the effective date earlier. Public companies had already begun to use the standard, which puts operating leases on the balance sheet for the first time at many companies.
According to polls during a series of recent webcasts by Deloitte, more than two-thirds (69.2%) of the 294 survey respondents said their private organizations will focus more on implementation in the fourth quarter of this year than they did in the third quarter. The top near-term compliance challenge cited by 46.9% of the respondents was lease data collection and electronic centralization, followed by shortage of staff availability to work on implementation efforts (19%), and figuring out where to start the implementation process (16.7%).
“Similar to what we observed when the public companies came online with the standard, private companies are having very much some of the same struggles, in particular identifying whether their contacts historically met the definition of a lease, knowing where the lease documents are that they’ll have to abstract and ultimately account for under the new requirements, and coming up with the assumptions needed to recognize the leases on the balance sheet,” said Tim Kolber, a managing director of audit and assurance at Deloitte & Touche. “There are some learning curves there. They’re going down the same path that public companies went down where they’re quickly realizing that adopting the requirements is not as easy as they anticipated.”
Selection and implementation of lease technology was cited as a challenge by 4.8% of the respondents, while 3.7% attributed the delay of their company’s implementation efforts to COVID-19 and the remote work of the past 18 months.
“I am seeing and hearing more private companies, many with smaller portfolios, starting to really think about the need for technology,” said Matt Hurley, a senior manager in Deloitte’s advisory practice. “They’re realizing that even with a small portfolio, there’s a lot to meeting the requirements and wanting some technology in place, even if they only have 10 to 20 leases.”
The technology may be somewhat complicated for the leases standard. “When it comes to implementing the technology, once an organization decides to go down that path, it’s not a matter of simply installing that application into their environment and calling it a day,” said Kolber. “The implementation of a technology is something that needs to be a well thought out process and could take several months. In addition to knowing where the leases are and knowing what data needs to be abstracted, there needs to be an evaluation sooner rather than later of the technology to go along with that. If an organization would like to implement a technology, they really should do so in an expedited manner because it takes time, and we’re down to three months until the standard will be effective.”
There are other reasons why organizations have been putting off adopting the standard. In a separate recent survey by lease accounting software provider LeaseCrunch, 48% of the respondents said they will not adopt early implementation of the new lease standard. The top three problems facing filers were incremental borrowing rates (50%), lease terms (28%), and fair values and effective lives (9%). The survey found that 22% of the respondents have not completed their lease inventory, and over 80% said their clients’ leases had been affected by COVID-19.
Many organizations are just waiting until the last minute. “It’s a new accounting standard, and every time you have a new accounting standard, the bulk of organizations say, ‘Tell me what’s the last day I have to do something about this,’” said LeaseCrunch CEO Ane Ohm. “We mostly are talking to CPA firms, and they’re talking to a lot of organizations at a time. We’re seeing the expectation being that most organizations aren’t going to start until next year. Even though it might be effective for them, they won’t start the project of implementation until we hit summer of 2022, and then there will probably be a big contingent.”
She sees similarities to the procrastination by many companies in implementing FASB’s earlier revenue recognition standard. “This is what happened with rev rec,” said Ohm. “When they get to audit time in early 2023, the firm is going to be saying, ‘All right, I cannot issue your financial statements until you get this done.’ That’s just what the expectation is.”
However, she doesn’t believe the implementation process will be that painful for smaller companies. “If an organization has just a handful of leases, it probably won’t take that much time,” said Ohm. “One of the things that we do is we have a tendency to make things seem hard. It’s not that this is going to be easy. It’s not a cakewalk, but also if we overcomplicate it, it makes people push it off even more, and so one of the things that I think is important from a messaging standpoint is that if you have 20 leases or less, and they’re pretty straightforward leases, don’t be afraid of this. You probably can do this in a pretty quick manner. There are tools out there, and our premise is we want to be as easy as possible to use so you can get this done in as painless of a way as possible, and then you’re ready to go. Rather than do scare tactics all the time, I like to make sure to let people know that you can do this. This isn’t that hard. There are certain complications, but there are a lot of tools out there right now that are going to ease the process. And as the FASB keeps making changes, the good news about those changes is that they’re typically to ease the process. So when FASB puts out a new update, as with the discount rate, it’s a big deal. It’s a good thing that they’re making it easier to implement in a way that reduces any adverse effects to the financial statements.”
There are some dangers to putting off the implementation process for too long, especially if a private company is planning to go public in the near future. “The reality of the matter is the further the implementation for private companies gets from the public company implementation timeline, the less comparable financial statements of similar entities within the public company and the private company domain become,” said Kolber.
In that case, they should accelerate their efforts to comply with the leases standard, also known as ASC 842 or Topic 842 for its classification in FASB’s Accounting Standards Codification.
“If you’re a private company that has going public on your mind or on your roadmap, one of the steps is going to be adopting 842,” said Hurley. “I’ve had several organizations that are private companies that may be private equity owned or may just be thinking about going public in the near term, and it’s accelerating their timing of when they want to be ready vs. other privates. They’ve decided to accelerate what they’re doing, adopt retrospectively as of a prior period so that they can be ready should the opportunity to go public presents itself, or to meet their timeline for going public.”