ASC 842: Avoidance is not an option for private companies
August 2021
As the owner of a private company—or an executive working for one—you’ve got a lot on your plate: post-pandemic challenges, financial concerns, building a safe environment for returning workers and more. The list goes on. So it wouldn’t be surprising if you’d moved Accounting Standards Codification (ASC) 842 to the back burner. Although that “I’ll-deal-with-it-tomorrow” approach was understandable last year, it no longer holds water, because “tomorrow” is here now.
Why private companies should care
- The deadline for private companies to implement ASC 842 is only six months away: It must be recorded by January 2022.
- The transition is more complicated and time- and resource-intensive than you may realize. In fact, implementing the new accounting rule is a sweeping regulatory change that can affect your accounting data, processes and systems.
- If your company is planning an IPO, merger or acquisition, new financing or a SPAC (special-purpose acquisition company) transaction, you may need to act even faster.
Starting now, private companies need to make sure their systems can manage, process, assess and maintain their leasing information and resources—both today and in the future. They also should review the budget that supports these efforts, as it may have been affected by the pandemic and may no longer be sufficient to support ASC 842 requirements.
Four ASC 842 challenges that should be addressed now
- Increased scrutiny: The new standard increases scrutiny on how you identify the lease population and divide a contract between lease and services. Due to the impact to the balance sheet and enhanced disclosures, data needs are increasing enormously—especially as a contract’s data points could be continuously modified.
- Information management: ASC 842 requires your company to gather significantly more information on leases. The new standard could also affect your financial ratios and metrics, lease-buy decisions, fixed-versus-variable payments, lease incentives, taxes, accounting processes and controls, as well as your IT and lease accounting systems.
- Compliance requirements: Compliance with ASC 842 is needed in order to issue financial statements, which are subject to audits. Companies that don’t comply could run into trouble with their lenders and creditors, as well as facing other financial repercussions.
- Real estate changes: As a result of the pandemic, companies may need a smaller office footprint, which may require contract modifications or a rental incentive—triggering an accounting assessment. Many firms are not sure what the “new normal” will be, so, as business models evolve, accounting must be able to adapt to those changes.
Lessons learned from public company challenges
If you’re skeptical about the level of work required to comply with ASC 842, check out what public companies did to meet their deadline in 2019. In fact, one reason the deadline for private companies was pushed back was because the Financial Accounting Standards Board (FASB) recognized the complexities of ASC 842 and responded to feedback from public companies that reported that the adoption efforts were tougher and took longer than they expected. Based on their experience, we recommend considering the following six steps to get you started:
- Find and hire the right consultant, select and deploy accounting software and get essential contracts signed. Those efforts took most public companies longer than expected, creating a logjam down the road.
- Get input and buy-in from stakeholders: this took public companies more time than they anticipated.
- Involve third-party vendors and service providers early in the process, to give your company a better understanding of its requirements and data inputs.
- Have ongoing dialogues to identify potential pain points and align with your auditors early on.
- Implement new lease accounting software with enough time to test different scenarios, run shadow processing for a quarter or more before the deadline, and resolve any software bugs and design flaws.
- Consider additional issues such as capital and liquidity requirements, debt restructuring, real estate footprints and possibly even LIBOR. By dealing with such issues at the same time as ASC 842, companies could save significant time and resources.
Private companies can learn from the miscalculations made by some public companies, but it’s important to act now. We look forward to discussing how we can help you navigate these challenges.
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