By Joel Hess on March 15, 2021 at 9:00 AM
I get it: the 2021 audit season is probably the craziest busy season your CPA firm has ever seen.
Between clients and your team working remotely or enforcing additional workplace safety measures, prioritizing PPP loans, and the general uncertainty we’re still dealing with almost a year into the pandemic, CPAs have a lot to think about this year. Don’t worry, I didn’t forget about the other priorities like managing audit fee pressure, additional cybersecurity, and new tax regulations.
One more thing: the implementation date for ASC 842 for your non-public clients is fiscal years starting after December 15, 2021, a looming deadline for which you’ll need to help them prepare.
Busy season is here, so it’s understandably difficult to focus on the new lease standard. However, a little prep work today can make all the difference in the future. Keep reading and you’ll find our simple lease standard implementation roadmap that helps clients plan their post-busy season activities now, saving hours of work for both of you later.
Planning for a successful busy season—and beyond
Here’s what usually happens whenever there’s a new standard: the CPA firms who delay conversations about the new lease standard end up having to raise fees—or reduce firm profitability—when there’s an inevitable rush to adopt. Meanwhile, the CPA firms who prepared ahead of time don’t have the same fee pressures later.
By spending time on the new lease standard now, you can bring your recommendations to your year-end audit meeting when your client is actively listening. This shows clients you’re already setting them up for success.
While no one wants to burn out their staff during the busiest time of the year, we’ve repeatedly seen what happens when CPA firms wait too long to prepare for new accounting standards: the burnout hits. Fortunately, the only action item you need right now is creating your plan. A simple roadmap can help you feel more confident and show your clients you’re prepared.
Your post-busy season roadmap to successful implementation
The following roadmap was made with your clients—and your time—in mind. To make it easy, we've made this roadmap into a PDF (which you can download by clicking here) to share with your clients at your convenience.
Lease capture/lease identification
The first step when preparing for the new lease standard is capturing all of the leases in your client’s organization. This can be a time-consuming task if they have many leases. Urging your clients to tackle this now will save them (and you) a lot of stress down the line.
ASC 840 compliance
Before your clients transition to ASC 842, they should ensure they’re compliant with the old lease standard. When lease information is incorrect under ASC 840, it complicates the transition into ASC 842 because they can’t easily utilize available practical expedients.
Two common mistakes are:
- Incorrectly classifying operating versus capital leases
- Not identifying reasonably-assured terminations or renewals when including future committed payments on the maturity schedule
Under the new lease standard, operating leases are now recorded on the balance sheet, so it’s even more important to review contracts for embedded leases. We’ve heard from multiple CPA firms and their clients that up to 10–15% of contracts contain embedded leases. Identifying embedded leases now will save hours of work later.
The new lease standard adds an ROU asset and lease liability on the balance sheet for operating leases, which could place a client in violation of one or more debt covenants. They’ll want to understand the implications for their financial statements and how added liabilities affect debt ratios. Encourage clients to talk to their bank well before implementing the new lease standard to ensure debt covenants are written so they remain in compliance even after adding leases to the balance sheet.
Lease accounting software
Lease accounting software makes the transition to the new lease standard simple and easy. After doing the above first steps, a software that simply guides you and your clients through the rest is what you’ll need to transition smoothly. By partnering with LeaseCrunch for implementing the new lease standard, you’ll have access to the easiest-to-use lease accounting software on the market.
Implementation starts now
While you shouldn’t wait to help your clients start implementing the new lease standard, you also don’t need to do all the work today. By introducing these small to-dos now—yes, even while you’re focused on busy season—you can ensure a successful and streamlined implementation when the time comes.