New accounting standards under the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) require organizations to record leases on their balance sheets. in 2019, and now it’s time for private companies to follow before the newly revised December 15, 2021 deadline.
Here are 10 lessons from which private companies will benefit.
Lesson 1: Start early
Public companies suggest that the earlier a company starts implementation, the smoother and less costly the process is. For private companies working toward the extended deadline, it’s not too early to start.
Lesson 2: Lease contracts are everywhere
The FASB’s leasing standards require private companies to record on their balance sheets leases embedded into other contracts. As a private business owner, this means asking yourself how many assets your business leases including those not explicitly defined. Companies underestimate their number of leases – from coffee makers to building space. Documenting leased items takes time.
Lesson 3: Complexity abounds
Contracts for car leases might be straightforward while land, equipment, and office leases can be complex. Companies need to have the right information, which involves reviewing the terms of each and every lease.
Lesson 4: Accounting will be stretched
The new lease accounting standards add more requirements for your accounting team. This may mean budgeting for additional accounting staff members who can gather lease data and interact with other departments and branch offices.
Lesson 5: Involve other departments
Private companies need to make sure their legal, purchasing, IT, property management, and other departments are engaged with accounting during the transition process. This outreach can help form a more comprehensive understanding of the company’s leases.
Lesson 6: Communicate
The conversion to the new lease accounting standards requires change for all departments and divisions involved. It’s important for your accounting team to provide regular updates on any new processes and requirements to ensure other departments are in the loop.
Lesson 7: Consider a project management approach
Ask these questions ahead of implementation efforts:
- Who are the key stakeholders?
- What data do we need to collect?
- Where do we get this data from?
- Are there new policies, procedures, software applications, and reporting requirements we need to put in place?
- Who do we need to train?
- What are the milestones and deadlines to mark important steps?
Lesson 8: Surprises
The biggest surprise most companies deal with is the number of leases they have. For example, one lease for several hundreds of units may in fact be several hundred leases because each piece of equipment needs to be tracked separately. Verbal agreement leases may also be required to be recorded in accordance with the new standard.
Lesson 9: Keep your auditors informed
The approach your organization adopts during your implementation process might have a significant impact on your balance sheet, so keep your auditors in the loop as much as possible. While auditors can’t make management decisions, you can share information on how your company will handle lease accounting going forward and the technology solution you choose. You can also allow your auditors to sit in on presentations or ask questions regarding lease accounting.
Lesson 10: Ask Your CPA Firm for Help
Adapting your company to the new lease accounting standards means considering all options that streamlines the process. In addition to a framework for compliance, many companies are seeking tools to perform critical analysis and automate processes to meet the compliance standards. Utilizing a CPA Firm can enable your company to manage their lease accounting processes efficiently while achieving compliance with the new standards.
Outsourcing allows you to ease into the implementation process by:
- Compiling lease data from multiple sources
- Performing multibook accounting under parallel standards
- Making mid-life adjustments automatically after lease modifications
- Creating a full suite of reports to satisfy disclosure requirements
Contact your trusted advisors at 415 Group about the Accounting Standards Update today.
