Founder and CEO, Visual Lease.
The financial world has a never-ending list of new standards and practices to adhere to, many of which intersect with the world of corporate real estate.
New lease accounting standard ASC 842 requires businesses to represent their real estate and equipment leases on their balance sheet. While this may sound like a simple process, it’s actually very complex and demands impacted organizations to revisit how they classify and manage their leases. They can (and likely will) spend 1,500-plus hours gathering and validating their lease data — and, that’s only one part of the lease accounting process.
The deadline for private companies to comply with ASC 842 is December 15, 2021. Thankfully, public companies have had to already adhere to this standard in 2019 and offer a cautionary tale to help those who have yet to go through it: Do not underestimate the time and resources required to achieve compliance. In fact, even after reporting earnings under the new standards in the first quarter of 2019, nearly half of the public company executives polled by Deloitte said they will have to spend at least the same amount of time and effort, if not more, on lease accounting implementation. This is an ongoing effort that will need to be prioritized before and after the deadline passes.
To get a better understanding of the common challenges and opportunities associated with ASC 842, we recently worked with Wakefield Research to survey 500 senior finance and accounting professionals at organizations with more than 1,000 employees. We excluded public companies from this study to get a true sense of how private organizations were faring with the pressure of their upcoming deadline and found that unsurprisingly, 92% are not fully confident about complying on time. Those that have started the process are finding it to be a more complicated endeavor than originally thought.
A Challenge Awaits
According to our survey, 41% of respondents are not yet compliant because they haven’t gathered all of their lease data. This is because the required data can be scattered across documents that are hundreds of pages long and in multiple places in an organization. Also, contrary to what you might believe, the needed information is not always found in leases. Further, it likely will change over time because leases are dynamic contracts. Changes in lease terms must be accounted for to maintain compliance with ASC 842.
Organizing and managing this information takes tremendous time and effort. An astounding 99% of respondents expect to face ongoing challenges after their 2021 deadline, and most of their reasons point to a need for better organization and resources. Tracking and managing modifications to leases, adopting new technologies to optimize the process, and executing new policies and processes should be top priorities in their lease accounting journey.
An Opportunity For Savings
Companies that don’t properly keep track of their real estate and equipment leases open themselves up to making mistakes that could cost them millions of dollars.
It’s not all bad news, though. There are real ancillary benefits associated with lease accounting compliance. This new standard serves as a rallying cry for companies to better organize and track these transactions.
Over the past 35 years, I’ve worked with countless organizations to maximize their return on their leases. I’ve seen firsthand the many advantages a properly managed lease portfolio can bring to a business: a more transparent valuation of the organization, cost savings, easier preparation for the audit process and the ability to make more strategic leasing decisions, to name only a few.
A New Operational Approach
The road to experiencing these benefits can be achieved through the right processes, collaboration and resources. Follow these three steps to sustain lease accounting compliance and unlock hard and soft savings:
1. Focus on adopting new processes and policies to maximize control over your records. You can achieve this by first evaluating your current process to identify major gaps or areas of opportunity — odds are, you’ll find several.
2. Increase collaboration across all involved parties — this is an all-hands-on-deck situation, typically between an organization’s accounting, FP&A, real estate, IT, legal and procurement teams. Ongoing and clear communication is key to expertly navigating new requirements and business priorities/changes.
3. Invest in or upgrade to new tech. Your technology should serve as an extension of your all-star team. This can lower the risk of human error, streamline critical parts of the process and create stronger cross-departmental visibility. (Full disclosure: Visual Lease is one provider of lease management technology.)
With the right resources in place, you can overcome the challenges and seize the opportunities associated with the new lease accounting standard.