The lease standard is delayed: Next steps for CPA firms and their clients
With the likely delayed implementation of the new lease accounting standard for privately-held companies, many organizations have shifted their focus away from the new lease standard to other priorities. However, while the delay allows us all a bit of relief against the tighter original timeline, the new standard should still be a focus for CPA firms and their privately-held clients.
In fact, I highly recommend using the extra time to make the implementation process easier, with the ability to transition to the new standard methodically and without rushing. In this article, I’ll share the top areas CPA firms and their clients can focus on right away to best prepare to implement ASC 842 next year.
Make sure ASC 840 is fully implemented
Even though many leases weren’t required on the balance sheet under ASC 840, they should have been captured in the footnote. However, I’m hearing that many organizations hadn’t previously included all leases in their disclosures, including embedded leases or non-real estate leases.
Another oversight I’ve seen is organizations not thoroughly considering reasonably assured lease terms, particularly for renewals. This understates committed future payments currently in the footnote. With all that in mind, it’s an enormous step forward for organizations to simply ensure they’re getting this right.
Conduct a thorough lease audit
A huge part of implementing the new lease standard is conducting a thorough lease audit, which isn’t quite as straightforward as it may sound. That’s because there are tricky, potentially “hidden” leases that need to be identified, including leases embedded in service contracts. Here are a few questions to consider during an audit:
- Determine if it is a lease for accounting purposes under the new lease standard, taking into consideration asset control and identification.
- Note general information about the lease, including name, description, lessor, lease terms, termination clauses, renewal options, discount rate, etc.
- Outline lease payment terms, including payment frequency, amount, start date and other relevant details.
- Classify the lease correctly based on ownership, economic life and fair value of the leased asset.
- Calculate variable and nonlease payments.
Analyze the impact of the new standard
Finally, now is a good time to analyze the impact that the new lease standard will have on an organization internally and externally. One major impact that many organizations did not foresee is with their banking relationships, particularly for companies that must comply with debt covenants for a loan.
Because the new lease standard adds operating lease committed future payments as liabilities on financial statements, financial institutions now have more information about an organization’s lease portfolio. That can affect how the bank considers credit availability and borrowing rates. The best way forward here is to analyze the impact and then communicate early with financial institutions.
My biggest message is this: Don’t let your clients lose momentum! If organizations put off implementation another year, they’ll be scrambling just like they were this year before the delay was announced. Encourage slow and steady progress for a far easier implementation.
Ane Ohm, CPA, is co-founder and CEO of LeaseCrunch, a software platform that helps CPA firms simplify the rollout of the new lease accounting standard for their clients. Previous roles include CEO of HarQen, CEO and president of LaserNet (acquired by Apex), vice president at Cielo, and vice president at Strong Financial Corp. She started her career as an auditor with Coopers & Lybrand (now PricewaterhouseCoopers) after graduating from the University of Wisconsin at Madison.