Lease Accounting: Key Takeaways and Next Steps for Private Companies
The Financial Accounting Standards Board’s (FASB) decision to defer the effective date for ASC 842 — Leases to annual periods beginning on or after Dec. 15, 2020, gives private companies an additional year from that originally provided. This means a private calendar-year company will have to adopt the standard as of Jan. 1, 2021, rather than Jan. 1, 2020. Now, private companies will have an extra year to implement the new lease accounting standard and can use that time to learn from the challenges many public companies overcame.
Although ASC 842 provides a number of practical adoption expedients, the adoption of the standard for public companies was far from easy, and most companies struggled with one or more of the following challenges:
- Availability and functionality of lease software tools
- Ensuring completeness of the lease population
- Accurate data collection and abstraction
- Deriving supportable accounting judgments, including determining a relevant discount rate for its leases
- Testing of the leasing tool
- Designing and implementing new lease processes and controls
Beyond the extra time, private companies stand to benefit from:
- Improved lease software solution readiness
- Public company disclosure and SEC comment letters
- Availability and experience gained by external resources and auditors
Lease Software Solution Readiness
Much has been written about the lack of readiness of lease software solutions in the wake of the effective date of the standard for public companies. This was also one of the arguments brought forward by the AICPA in its request to defer the adoption date for private companies. Since then, lease software solution providers have improved the functionality of their products significantly, and those solutions will likely be in the market for two years by the time private companies need to go live. That said, careful diligence is still required to pick the lease software solution that is right for your company.
Public Company Disclosures and Elections
ASC 842 provides a number of practical expedients and other options that private companies can look to public companies for benchmarking. Table 1 lists a few of them for reference.
KPMG Findings of Public Company Disclosures of Lease Accounting
- All companies stated they used the effective date method transition approach.
- 92 percent disclosed using the package of practical expedients.
Only 13 percent disclosed using hindsight in their transition accounting.
- 86 percent disclosed using the short-term lease exception.
- 78 percent disclosed that they elected not to separate lease and non-lease components for one or more classes of underlying leased assets.
- 95 percent disclosed using their incremental borrowing rate (IBR) as their discount rate for leases.
- Approximately 70 percent presented operating lease ROU assets and non-current operating lease liabilities as separate line items on the balance sheet.
- Slightly less than half presented the current portion of operating lease liabilities as a separate line item.
- Far fewer companies are presenting their equivalent finance lease ROU asset and lease liabilities separately on the balance sheet.
Source: KPMG review of public filings. The results are the outcome of a review of public filings conducted by KPMG of a select sample of public companies, across industries. The results were presented during KPMG’s FRV ASC 842: Lessee post adoption hot topics webcast held on Sept. 24, 2019.
Experience and Availability of External Resources and Auditors
External consultants and auditors have worked with countless companies on the implementation of the lease standard and therefore have good experience with common practical implementation complexities. Also given the staggered start time, resource levels are not as tight as they used to be. The same is true for your software implementation partners.
Next Steps for Private Companies
Following is an illustrative list of steps which may be performed for a successful lease implementation:
- Get executive sponsorship and avoid creating silos. The implementation process will reach deep into the business and requires support beyond the finance organization.
- Perform a thorough assessment of accounting, reporting, process and control changes under the new standard, and roll out tailored training to the organization to alert them to what will change.
- Develop business requirements for a lease tool and select a vendor early (the specific software drives data collection requirements).
- Perform and document procedures to ensure a complete inventory of leases (including embedded leases). This will be a key audit focus area.
- Get buy-in on a data collection approach and template, and roll out detailed training to ensure good data quality. It is imperative that there is central oversight over the initial data collection to weed out quality issues before the data is loaded into the tool.
- Ensure sufficient user testing of the lease data and develop opening balance entries and disclosures.
- Determine the discount rate approach and establish relevant processes and controls.
- Update lease processes to capture and maintain lease data, including the relevant controls, to ensure compliance post initial adoption.
Companies should involve their auditors early but particularly for steps two, four, six and seven.
The bottom line is the time to get started is now. If there is one thing that public companies learned: adopting the lease accounting standard required significantly more effort than they expected.
Amit Singh is a director in the accounting advisory services practice at KPMG (US).
Ingo Zielhoff is a partner in the accounting advisory services practice at KPMG (US).
This article appeared in the January/February 2020 issue of New Jersey CPA magazine. Read the full issue.