Prepare for ASC 842 Implementation…Again

Yet another new US GAAP accounting standard is arriving on the scene for nonpublic companies; this time for leases. With the new lease standard of ASC 842 comes another implementation project requiring technical review, complex calculations, and documentation to meet the requirements of auditors and review teams. Find out how you can prepare for the latest wave of US GAAP guidance.

As businesses reach the end of April 2022, accounting and finance teams have already endured a lot this year. Most public and nonpublic companies are required to issue their 2021 annual financial statements in March and April – that's right, smack dab in the middle of annual tax filing deadlines. Once we clear the hurdle of spring, we can finally breathe a sigh of relief and relax the rest of the year, right?

WRONG. Like your favorite MMA fighter, the US GAAP accounting world likes to keep the hits coming, this time with a complete overhaul of the leasing guidance via ASC 842, Leases. While publicly traded companies have already completed the adoption process in recent years, the fun has just begun for nonpublic companies, who are required to adopt ASC 842 for fiscal years beginning after December 15, 2021 (calendar year 2022 for businesses with calendar year-ends).

The new leasing guidance now requires a company to take a fresh look at all its new and existing leases, including any lease amendments, and run them through the new 842 model to identify the right inputs and contract terms for proper classification and accounting treatment. Remember how fun it was to read through all the terms and clauses of your company’s revenue contracts for ASC 606 adoption? Now add agreements that focus on real estate and equipment.

And the fun doesn’t stop with the leases of which you’re currently aware. Auditors of a company’s ASC 842 implementation are also looking for comfort over the completeness of the lease population. In non-auditor terms, that means going in and searching the company’s vendor relationships for any service contracts or other arrangements that might now meet the definition of a lease under the new guidance. So guess what? You might need to put new leases on your books that you never knew even existed!

Implementing the new leasing standard can be a tall task. Here are a few tips to get you started on the process:

Centralize all lease agreements and amendments

One of the toughest parts of a lease implementation is simply finding the information that you need. For starters, this means reaching out to your Operations and Facilities Team or Legal Counsel for all of the company’s lease agreements and amendments. This is easier said than done. It takes time to search and find various documents that are lost in obscure file directories or buried in old e-mails of former employees.

Once that search is over, make sure to save everything to a central location that can be accessed by multiple parties, including the accounting department. This central location should also become the go-to location for new lease agreements or amendments that are executed by the company in the future, unless you want to go through the joys of another search down the road.

Consider implementing leasing software

Calculating the balance sheet amounts for a lease – and their ongoing impact on your income statement– requires relatively complex calculations and can result in an absolute headache. And these calculations aren’t just performed on Day 1 of a new lease, but also for any amendments or other modifications to the terms of the lease. Now multiply that effort by the number of leases your company has, and keeping up with the accounting treatment for leases manually becomes a full-time job in itself.

The good news? There is a growing number of software solutions dedicated to streamlining lease management and accounting treatment at a reasonable price. Features include the automatic calculation of new and amended lease balances, automated reports for financial statement footnote disclosures, and creating journal entries. Some providers even boast AI that automatically scans and inputs the key terms of a lease into the system. This may not be necessary for service-based or fully-remote businesses (*cough Zeroed-In cough*) with very few leases. However, other businesses may have numerous entities, offices, factories, warehouses, and other facilities where the benefits of a leasing software can greatly outweigh its cost. We recommend considering the use of leasing software for companies with a lease portfolio of 20 leases or greater. And what kind of future-focused firm would we be if we weren’t recommending technology solutions?

Talk with your department heads

As part of the ASC 842 implementation process, a search should be performed to identify any previously embedded or unidentified leases. You may be unpleasantly surprised to find certain vendor arrangements that meet the definition of a lease. Or maybe you just decide not to do it…until your auditors require you to do it, or do it themselves, resulting in significant back-and-forth and potential audit adjustments or deficiencies. To avoid these surprises, start asking your company’s department heads if they are aware of any service contracts or other vendor arrangements that involve the use of a physical asset that is not owned by the company. Doing so could point you in the right direction of potential unidentified leases, and save you the headache of sifting through and reviewing an enormous number of transactions and vendor contracts.

Consult a technical accounting expert

Last but not least, these implementation projects can be extremely difficult when starting from scratch – even when you’re aware of the basic steps. Do yourself a favor and engage a technical accounting expert who can bring the knowledge and efficiency from experience with other companies of all sizes. Plus, having extra resources during crunch time allows you to focus on your day-to-day rather than digging through the details of a cumbersome accounting project.

What’s that? Why yes, Zeroed-In Consulting does happen to provide ASC 842 implementation services, including tools for every step of the way and extensive experience from past projects! Let us know how we can help you and your company navigate this latest accounting challenge, as well as any others.