FASB Delays Move to ASC 842: How One Global Manufacturer Made the Most of the Extra Time

by Marc Betesh

As ATG began to prepare for adoption, its project leadership team looked for a lease accounting software solution to simplify compliance reporting and serve as a key repository for lease data.

© Yozayo/iStock/Getty Images Plus

Following the FASB’s recent decision to extend the deadline for its ASC 842 standard for a second time, privately held companies have an additional 12 months to prepare to comply with sweeping new rules for how operating leases are disclosed on their balance sheets. While the new lease accounting rules are slated to go into effect in 2021, private companies and qualifying not-for-profit organizations now have the option to defer until 2022.

Reflecting on the Public Companies’ Journey to Compliance

The delay is meant to provide flexibility to private companies and government entities that are managing the operational and economic impacts of COVID-19. By comparison, public companies transitioned to the new standard in 2019. If there is anything to be learned from their experience, it is that gathering lease data from across the organization is more complex, and time- and resource-intensive than anticipated. For example, several public companies, which are larger and heavily staffed, have reported that it took them more than a year to just collect their lease data.

Instead of putting the implementation and adoption process on the back burner, private companies should use the extra time to their advantage. By identifying all leases under management, analyzing the terms and amendments and organizing information from disparate systems into a single database, companies will not only set themselves up for a smoother adoption process and long-term reporting success, but may also identify near-term opportunities for cost savings and operational improvements. 

Getting an early start will be especially critical for organizations with a significant number of real estate or equipment leases such as manufacturing, logistics, retail, healthcare and universities. One of the biggest implementation “pain points” for organizations with large lease portfolios is often the uncertainty around collecting the data required to populate a solution that will manage their portfolio and put them on a path to achieving compliance.

According to a PwC survey, prior to the original reporting deadline, 39% of companies were managing their lease agreements and related accounting in a decentralized manner, which meant they needed to gather information from dozens, perhaps hundreds, of separate sources. Even at companies with centralized lease portfolios, the information was often housed in multiple spreadsheets and scanned pdf files that had inconsistent characterizations of lease terms. Furthermore, a shocking 78% of respondents reported they had to manually collect the data from their lease contracts to comply with the new accounting standards.

One Private Manufacturing Company’s Journey to Compliance

The massive lift required to compile data from multiple sources and formats – and then to ensure it is accurate and complete – often stops companies in their tracks. A great example of a private business that is effectively managing this is Apex Tool Group, LLC (ATG), a leading global manufacturer of professional hand and power tools. Following the first round of extensions offered in 2019, ATG decided to stay the course and push forward towards early adoption of ASC 842 compliance. Its experience is representative of the journey that many others may encounter. It also highlights why starting sooner, rather than later, is optimal.

As a global organization, ATG manages a diverse portfolio of leased real estate, equipment and vehicle assets distributed across multiple locations worldwide. Given the nature of its portfolio and the complexity and nuances of ASC 842, ATG realized that Excel and manual calculations would not be sufficient. As ATG began to prepare for adoption, its project leadership team looked for a lease accounting software solution to simplify compliance reporting and serve as a key repository for lease data.

Once software was identified, ATG began the laborious process of data collection. “Like many other companies preparing for lease accounting compliance, gathering a complete and accurate inventory of our leases proved to be the most time-consuming and challenging part of the process,” said Nick DeNichilo, Director of Financial Reporting and Technical Accounting at ATG. “We began compiling data about a year prior to our targeted implementation date. We knew it would be a daunting task to gather all our lease information, considering our numerous entities and leases throughout the world, including complex leaseback real estate agreements.”

Although ATG began organizing its lease data early, the dynamic nature of lease management required the need to continuously address updates in real time throughout the process. As new leases were continuously being executed, amended and terminated, the data being collected had to stay up to date throughout the process.

Centralizing and consolidating all lease information into a central repository was the first step towards ATG being able to confidently track changes in real time and ensure they were captured for any accounting purposes. As a result, there were fewer challenges along the way and for those that did occur, the team responsible for lease accounting / management were able to address them without the time crunch of a looming deadline leading to additional mistakes.

Reaping the Rewards of Early Adoption

ATG successfully completed implementation and has been ASC 842 compliant as of January 1, 2020.

Since implementation, ATG’s team is able to:

  • Perform monthly and quarterly lease accounting calculations with greater simplicity and ease. This includes producing reports such as FASB journal entry summary and year-to-date balance sheet/income statements entirely within the system with no additional outside manipulation.
  • Quickly deliver support and backup to external auditors.
  • View lease-level details and distribute lease information to individualized areas across a global business from a key repository.

Beyond meeting financial reporting obligations, having its key lease financial information in a centralized location has the added benefit of optimizing processes and providing greater visibility across the organization. ATG has been involved in ensuring there are organized processes around updating, editing and approving any changes to their leased assets, leading to the expansion of automation opportunities. This has enabled better decision-making and helped the company create efficiencies and identify opportunities to improve the bottom line.

Progress Must Continue

According to PwC, after FASB’s first deadline extension in 2019, 40% of non-public companies reported their ASC 842 implementation was in progress while an additional 32% were still assessing the impact and 13% had not yet started. However, of those already implementing, 35% stated that they were delaying their compliance solution implementation plans to focus on other priorities after FASB granted an additional 12 months to meet the new standard.

While the new extension granted this year in light of COVID-19 may be necessary for some, and may spark additional delays, those that are not faced with trying to keep their company afloat should move forward with adoption. By starting ahead of schedule, companies can work towards compliance in a smooth and efficient manner, tackling challenges along the way and making sure that every lease accounted for – and done so properly. Not only will this put companies on track for accurate reporting, using this time to automate manual efforts involved in managing leases also provides additional operational efficiency and can help easily identify and avoid costly errors, resulting in greater cost savings.

Marc Betesh is the Founder and CEO of Visual Lease.