How deals can accelerate your ASC 842 adoption

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Observations from the front lines

The year 2020 brought us both a global pandemic and a historic presidential election. But amid those headlines, it also saw an active initial public offering (IPO) market supercharged through the use of investment vehicles known as special purpose acquisition companies (SPACs). Although it’s early, this trend shows no sign of abating in 2021. This will no doubt stoke interest for portfolio companies owned by private equity firms and other privates with aspirations to go public.

Adopting ASC 842

While a capital raising event can have numerous benefits, the process requires a thoughtful and comprehensive roadmap to identify the key steps and ensure you’re ready. One often overlooked component is considering the impact of new accounting standards whose adoption may be accelerated — most notably the new lease accounting standard, ASC 842. The new leasing standard is one of the most significant accounting changes that remains unadopted by private companies, due mainly to its potentially pervasive impacts on accounting, data, systems and processes.

Many private companies aren’t required to adopt ASC 842 until January 2022 (assuming a calendar year end). Since many private companies only report annually, the impact of adoption of the new standard may feel far off. However, given the current IPO market, many private companies may need to accelerate their adoption timeline. Public offerings can be transformative to businesses, and that is likely to bring pressure to identify and address financial reporting requirements — sometimes under a highly compressed timeline where internal resources may be constrained.

Your adoption timeline can be accelerated for a variety of reasons 

Capital markets event (IPO and SPAC mergers): If you’re contemplating a capital raising event such as an IPO or via a SPAC merger, you need a plan. Considering the adoption of ASC 842 should be a part of it. 

The adoption timeline will vary depending on the nature of the transaction (e.g., SPAC, traditional IPO) and the filing status of the entity:

ASC 842 effective date

Entities that don’t meet the EGC requirements are required to adopt the new standard as of January 1, 2019. For private companies that have not early adopted ASC 842, this means that the S-1 (IPO) or S-4 (SPAC) filings will need to reflect the impact of the new standard as of January 1, 2019, which would require them to go back to previously issued FY2019 and 2020 financial statements and audit and layer in the ASC 842 implementation as part of its PCAOB top-off procedures. Depending on the extent and complexity of your lease portfolio, this likely will add time and complexity to the broader PCAOB top-off procedures companies routinely do as part of the initial filing.

As noted in the table above, companies that could meet EGC status based on their revenues and other metrics may be able to keep their private company adoption timeline for ASC 842 (i.e., January 1, 2022). However, companies need to be mindful of the fact that when that filing status is lost in the future, the company must be prepared to adopt any deferred accounting standards in its subsequent reporting period. If there is a chance that EGC status may be lost prior to January 1, 2022, it will be important to identify the work necessary to properly transition. The data, controls and systems that are often part of any lease transition can require significant lead time — again depending on the extent and materiality of the lease portfolio. Therefore, you want to consider future growth projects and trends on key metrics to proactively assess the risks of an accelerated adoption timeline. 

Even if you don’t have a risk of pushing up the adoption timetable, investors and analysts may raise questions of the potential impact of the new standard during the marketing process considering the adoption timeline will be right around the corner shortly after the execution of the transaction (i.e., January 1, 2022). Once you consider the reporting model, you will also want to understand the costs and resource needs as well as:

  • Lease liability and right-of-use asset balance sheet gross-up and related impact to key performance/financial metrics (e.g., return on assets, debt-to-equity ratio, etc.)

  • Potential impact of lease liability recognition to the company existing covenants

  • Impact of transitioning complex transactions (e.g., deferred gains on sale-leasebacks, financing arrangements arising from build-to-suit leases, etc.)

  • Impacts on credit rating agencies

  • Control-related implications if the company has control related deficiencies identified as part of its adoption process

  • SAB 74 disclosures where companies will need to disclose not only the impact of the new standard but also its adoption status

How PwC can help

Our team offers private companies deep, integrated lease accounting, tax and operational expertise. We can help evaluate and analyze a wide range of lease accounting solutions to enable compliance, accuracy, savings, process automation and operational efficiencies. We look forward to discussing how we can help you navigate ASC 842 adoption and emerge stronger.

Specifically, if your company needs to quickly achieve ASC 842 compliance to meet an accelerated effective date due to capital raising and other milestone events, we can provide a clear path for achieving your lease accounting transformation. Leveraging our deep experience and expertise, we have helped companies successfully implement the new standard in as little as two to four months by following our three stage approach focusing on key impact areas:

ASC 842 3-stage appproach

The bottom line: Don’t wait!

Take advantage of the extra time you may have now to start assessing the impact and implementing the new standard. The more proactive your company is with the analysis, the better prepared you’ll be to execute on successful capital markets and other milestone events that your company is contemplating. 

“Observations from the front lines” provides PwC’s insight on current economic issues, our perspective regarding the financial reporting complexities and what companies should be thinking about to effectively address those issues. For more information, visit www.pwc.com/us/cmaas.

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David Bohl

Partner, PwC US

Brandon Campbell Jr.

Managing Director, PwC Deals Practice, PwC US

Donghyun Kim

Deals Senior Manager, PwC US

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