The implementation of ASC 842 in 2023 marked a significant shift in accounting practices for private companies. This new standard, one of the most substantial changes in recent accounting history, mandates the recording of most leases on the balance sheet, fundamentally altering how entities account for leases.
As with any major transition, ASC 842 brought its unique challenges, demanding judgment and flexibility rather than relying solely on fixed rules. Below, we delve into some of these challenges and the lessons learned a year after the ASC 842 implementation deadline for private companies.
Lease Modifications: A Persistent Challenge
Determining lease terms and recognizing lease modifications was a critical issue. Some companies struggled to identify these changes, leading to a reactive approach in accounting. To address this, companies must develop processes to monitor for lease modifications and impairments proactively, ensuring timely reassessment and appropriate accounting actions. Understanding when to flag potential issues is crucial for maintaining compliance.
Lessons from Acquisitions
A key lesson for entities involved in acquisitions, particularly those backed by private equity, was the importance of understanding lease commitments. In some cases, accounting departments were unaware of the lease obligations of their acquired entities, leading to the discovery of new leases during the implementation process. This emphasizes the need for a thorough review and understanding of leases during the acquisition process.
The Pitfalls of Procrastination
Many companies delayed implementing ASC 842 until the last minute, exacerbating challenges due to understaffed and underprepared accounting departments. Additionally, many companies underestimated the number of leases in their portfolio, leading to unexpected complexities.
Practical Expedients: A Silver Lining
On a positive note, the adoption of practical expedients offered some relief. These provisions allowed companies to simplify certain aspects of lease accounting, reducing the burden of estimation and supporting calculations. This approach was widely embraced, with companies avoiding more difficult expedients.
Moving Forward: Tips for a Smoother Process
Looking ahead, companies can take several steps to mitigate challenges in lease accounting under ASC 842:
Effective Lease Tracking: Establish robust systems for tracking leases and lease-related events. Companies should ensure that all contracts are funneled through the accounting department for evaluation, with internal controls in place to identify reassessment and modification triggers.
Enhanced Communication with Accounting: To prevent last-minute surprises, accounting teams should be involved early in the process of entering, modifying or signing leases. This proactive involvement can prevent oversight and ensure timely accounting responses.
Consideration of Lease Accounting Software: For companies with numerous or complex leases, investing in specialized lease accounting software may be beneficial. This technology can streamline tracking, reporting and compliance efforts.
Continuous Learning and Refresher Training: Given the focus on transition last year, make it a point to refresh your understanding of the nuances of recording new leases and handling modifications. Stay informed and consult with accounting professionals to maintain compliance with ASC 842.
ASC 842 is not a one-time change but an ongoing standard that requires continuous attention and adaptation. By implementing these strategies, companies can navigate the intricacies of lease accounting more effectively and ensure continued compliance.
For guidance on implementing or maintaining ASC 842 and other accounting standards, our skilled professionals are here to help. Connect with a team member today.
Published on January 11, 2024