Private companies still unprepared for leases standard

Accounting

A sizable chunk of private companies still aren’t ready to implement the new lease accounting standard before the end of the year, despite postponements in the deadline due to the pandemic.

Nearly one-fifth (19.8%) of executives at privately held organizations feel unprepared to comply with the Financial Accounting Standards Board’s lease accounting standard, according to a new poll from Deloitte. On the positive side, though, Deloitte has been conducting similar webcast polls for the past few years, and 27.7% of the 1,130 executives polled during an April 28 webcast feel prepared to comply, and that’s the highest private entity executive confidence rate in six years.

FASB has repeatedly delayed the leases standard for private companies, most recently because of the outbreak of the COVID-19 pandemic last year, when it also moved to postpone the effective dates for several of its other major standards. However, publicly traded companies were already expected to begin implementing the standard before the pandemic began spreading across the country. The deadline is approaching soon for privately held businesses too. They are expected to include most leases on their balance sheets for fiscal years starting after Dec. 15, 2021 (that is, for calendar periods beginning Jan. 1, 2022).

Brent Lewin/Bloomberg

“In response to COVID-19 pandemic disruptions, the FASB acted quickly in early 2020 and provided an optional, additional year for private companies and private not-for-profit organizations to adopt the lease accounting standard,” said Tim Kolber, a managing director and co-lead of accounting standard implementation services in the Audit & Assurance practice of Deloitte & Touche LLP, in a statement. “Our polling data at the time suggested that 63.8% of private company executives planned to take advantage of the extension. FASB lease accounting standard adoption is mandatory, so I’m hopeful organizations are closely focusing on it now.”

Separately, the lease accounting software company LeaseQuery recently updated its Lease Liabilities Index, which found that for public companies, the transition to the new lease accounting standard created a 4x increase in average lease liabilities, while for private companies, the transition created a 13x increase in average lease liabilities. The study analyzed 10 industry sectors, and found the banking sector saw the greatest average liability change at 12,940%, followed by higher education at 7,274%. Manufacturing companies’ liability change was the lowest of the 10 sectors analyzed at 154%.

Deloitte suggested private companies assess how close they are to completing their lease accounting implementations. They should take note of whether the organization has changed its leased real estate footprint. As a result of the pandemic, some companies have reduced their real estate footprints, expecting employees to work remotely for the foreseeable future or for other business reasons. Whether an organization needs to exit a lease prior to contract term end, modify existing lease agreements or execute a sale-and-leaseback transaction, they require different accounting treatments.

As organizations adopt FASB’s cloud computing accounting guidance, the way they’ve adopted the lease accounting standard could provide some opportunities to structuring cloud agreements for specific accounting treatment. Aligning lease data collection and systems implementation efforts with accounting policies can help reduce some of the complexity, as well as creating a process to keep policies current with guidance.

As with most complex programs, companies should identify who is responsible for which aspects of lease accounting can be invaluable, especially as some of the work is manual and labor-intensive (such as lease interfacing and report consolidations).

Employee communications and training should be developed and customized for the education of specific, highly involved groups of employees and vendors. Leaders across the organization should be updated frequently on progress while also communicating to employees about the importance of mandatory lease standard adoption. Communicating clearly with lenders and investors about lease accounting impacts to operations and financial statements can also help build goodwill.

In terms of technology, all appropriate lease data should be centralized, captured and checked for accuracy. Once the lease data is ready for lease accounting use, companies should check to see if it aligns with the organization’s accounting policies. Companies should develop a process to maintain lease data going forward, as changes can occur frequently.

If lease accounting technology will be used, work with the IT department to define requirements and test it end-to-end; work to remediate challenges identified in solution testing; and discern who will perform needed manual labor to organize data and information to be entered. Engage end users of lease data early and often on the new and different ways that data must be tracked and used going forward.

“Some shifts organizations made during pandemic-driven disruption have implications for lease accounting, not the least of which are cloud migration and real estate footprint changes,” said

Sean Torr, a managing director at Deloitte Risk & Financial Advisory and an accounting and reporting leader at Deloitte & Touche, in a statement. “Whether private entity leaders are among the concerningly high rate of those feeling unprepared to comply with the lease accounting standard or not, now is the time for those leaders to start asking questions around the status of implementation efforts. While some private entities may have as few as 20 equipment and real estate leases in their portfolios, we still advocate for rigor in the standard’s adoption. Focusing on getting lease accounting right should be a top priority for U.S. privately held organizations in the months ahead.”

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