By Joel Hess on October 25, 2022 at 8:00 AM
FASB’s proposal to once again delay implementation of the new lease standard by one year for non-public companies brought some relief amid the COVID-19 pandemic. At the same time, it’s important that non-public organizations not get complacent, as there are many reasons the new lease standard should still be top of mind.
We’ll discuss 6 of those reasons in this blog, largely focused around myths and misconceptions my team and I have been hearing since the delay was first announced. CPA firms can use these as talking points with your clients when discussing their preparation for the new lease standard.
1. You’re underestimating the time necessary
December 2021 might sound like a long way away, but one of the biggest lessons we should take from public organization implementations is the time involved. We all underestimated the time and effort it would take to implement this new standard, so my advice to non-public companies is to begin initial preparations now.
2. You may be making this common mistake
Another essential takeaway from public organizations’ implementation experience is the impact of the new lease standard’s predecessor, ASC 840. The problem is that many organizations did not fully implement ASC 840, which means they do not have an accurate picture of their lease portfolio. Plus, without ASC 840 compliance, organizations cannot use practical expedients provided by FASB to simplify the transition to the new standard.
If your clients do nothing else in the next few months, I highly recommend they review their compliance with ASC 840, especially reasonably assured lease terms and a contract review to identify all leases, included embedded assets.
3. There are other business implications
Another impact of the new lease standard that many organizations did not consider is the effect on various business relationships, such as financial institutions. Once operating leases are captured on financial statements, lending firms may view those additional liabilities as a change to the organization’s debt ratios or credit agreements, affecting loan covenants.
Non-public organizations should communicate with their financial institutions early if they foresee such an impact, to avoid unpleasant surprises post-implementation.
4. There may be financial benefits
I’ve heard from many accountants and CFOs that they are putting off the new lease standard partially because they don’t see any benefit or value, viewing it instead as simply a regulatory burden. However, analyzing your lease portfolio while implementing the new standard may help you streamline your lease expenses.
You may discover opportunities to consolidate vendors or renegotiate lease terms, for example. Going through this process is also a good time to add more process and oversight around leases (if needed), adding efficiency and reducing risk for the organization.
5. Technology doesn’t have to be scary
It’s not logical, but I know that when I’m dreading something, I tend to put it off. And I think there are definitely some people avoiding the new lease standard because they’re not ready to face the decision of which lease accounting software to choose, not to mention the process of implementing and using the tool.
But guess what? Software doesn’t have to be scary! There are lease accounting solutions, like LeaseCrunch, that are robust yet extremely simple to use, and make implementing the new standard significantly easier.
6. You can’t predict the future
If a client still isn’t convinced, here’s my final argument. It’s easy to look ahead to the new effective date (the fiscal year starting after Dec. 15, 2021) and think there is plenty of time to implement the new standard. But even if that is the case, you never know what 2021 holds. An organization could face unexpected projects, a merger or acquisition, staff reduction, or any number of unplanned scenarios.
If the company has time to get started on the new standard now, do it! As I like to say, “Future You” will thank you.