Why You Should Care About FASB 842 Lease Accounting Changes
Depending on your role in an organization, you may not think about accounting standards very much (or at all). If there are changes to lease accounting standards, shouldn’t it only matter to accountants? In fact, there are many reasons you should be thinking about the implications of lease accounting changes.
The new accounting standard, FASB ASC 842, requires non-governmental companies and organizations to include lease obligations on their balance sheets. For lessees, the recognition of lease-related assets and liabilities, as well as changes to the timing of lease expense recognition, could have significant financial reporting and business implications. For public companies, the deadline to comply with FASB begins fiscal year 2019. Private companies have until fiscal year 2020 to report on the new standard.
While some companies purchase their equipment, others will need to factor in equipment leases. For example, a home improvement store must consider equipment leasing for its forklifts, trucks, etc. When changes to the FASB accounting standard were announced in 2016, you may have thought about whether these changes to the accounting standard would change your buying decisions. Now, you may know that FASB 842 shouldn’t change buy vs. lease decisions, but might change terms or how deals are structured.
There are other business implications that you need to consider with lease compliance. A primary impact to your business are the implementation costs of FASB. You need to:
- work with your accountants and auditors
- review internal business controls and processes affected as part of the transition
- identify and implement a new software system
- understand how to use that new software
After the announcement about the FASB changes, your organization may have thought “OK, we’ll worry about that in 6 months or a year.” But because every business is a little different in how they handle certain accounting numbers, 2017 is the year of transition for many organizations.
With a lot of visibility and a lot of leases, the Fortune 100 and Fortune 500 are early adopters of the new FASB standard. These big organizations are always thinking ahead. For these companies, FASB has a significant impact, because their business will change substantially, their business processes will need to adapt, and they will need to integrate other systems, such as ERP, with lease administration software that has FASB capability.
These companies have decided to implement a new system by the end of 2017, using 2018 as a reporting-in-parallel year and managing their business with the old and new standards. Then, they can look at their “old numbers” and their “new numbers” to determine the impact on their business.
For others – whether it’s the majority or the laggards – the second half of 2017 is when they get serious. Early adopters have already upgraded or implemented lease administration software to enable FASB 842 compliance. Accruent’s system has been audited to ensure that our calculations are correct and schedules run correctly.
For smaller companies, both the time pressure and the impact of the new FASB standard to their business will affect how quickly they update their processes and systems. Smaller companies need to think about the number of leases they have and how much these FASB changes will affect their financials.
If you’re in the majority or a laggard, you may feel like kicking the can down the road. But you need to prepare your organization for these changes. Because the changes to FASB 842 aren’t just about what it means to be compliant, but about how you run your business. You have an opportunity to:
- automate your processes
- move beyond spreadsheets (which don’t allow for that level of complexity)
- review business controls (e.g., validating rents and finding errors)
- find a system to help your organization become more efficient
Historically, Finance didn’t think a lot about lease administration software; they would just receive reports from lease administrators. With this new standard, Finance must bring all these leases and all these operating expenses onto their balance sheet which substantially changes how they calculate and report their numbers, how they amortize, etc.
Now, Finance needs a system to solve the issue of compliance with this new accounting standard. The key stakeholders may still be lease administrators and IT, but they’re not the decision makers. The decision maker is the CFO or the Controller who wants to ensure the system meets the FASB standard. These decision maker(s) need to confirm that IT can support the system and lease administrators can use the system to do their jobs.
That said, the impact of FASB goes beyond Finance. Those in your organization who make lease decisions must think about the downstream effects of their decisions. Human Resources must review bonus calculations. Real Estate must be incentivized to make good decisions. Investor Relations must explain the impact of the FASB changes to investors. Of course, communication across your organization will be imperative.
Last but not least, remember to consider your business processes. Determine roles and responsibilities. Confirm the location of your leases and lease data. Understand how that data rolls up into reports. Think about the reporting that’s needed for your CFO. By working together, there’s an opportunity to not only meet the new standards, but to increase efficiency across your organization and run your business more effectively.