This article discusses the most frequently asked questions about the new leasing standards and their answers as well as how blumshapiro can help you and your organization.
All public and private companies will be required to follow the new standards, but those with many leased assets will see the biggest impact. Although real estate leases are often the largest line item, companies may have many more equipment, technology, vehicle and other lease contracts. Organizations in the retail, healthcare, financial services, and telecommunications industries, for example, tend to have relatively large real estate lease expenses that will need to be capitalized. But even businesses without leased real estate will need to address the new standards.
Yes. Potentially, many companies will view the standards change as an opportunity to review and update leasing practices from stem to stern. In some cases, the new standards will impact the buy vs. lease decision. Lease negotiators may want to move away from gross leases to those that call out service rent and other charges that don’t need to be capitalized. The practice of lease administration will come under more scrutiny by auditors and financial managers than ever before, so new levels of review and audit trails will likely be implemented.
The short answer is right now. According to the Journal of Accountancy, “Almost one-fourth (23%) of companies surveyed by PwC and commercial real estate services firm CBRE said they hadn’t started their lease accounting adoption efforts yet. A Deloitte survey also showed that 31.4% said their organizations were unprepared to comply with the new standard.” That means there’s a lot of work left.
Compliance with the new standard is required for private companies starting with reporting periods that begin after December 15, 2019 (meaning 2020 for organizations that operate on a calendar year basis). However, private companies with public debt—such as many hospital systems—may be compelled to report based on the time frame for public companies.
A substantial amount of GAAP financial statements are required to satisfy a loan covenant with a bank. These same covenants may also require that certain financial covenants be met, such as debt to equity ratios, etc. As an example, this new standard will require assets and liabilities, known as right of use assets and right of use liabilities, to be recorded. This could then cause companies to potentially fail financial covenants they may have previously met.
Yes. Compliance with the new leasing standards is complex, and there are many opportunities for incorrect calculations. The best vendors have partnered with CPA firms to ensure accurate calculations and the appropriate application of the rules. We at blumshapiro have partnered with AMTdirect, which has also been recommended by PwC, EY, CFGI and RSM.
A system can offer full reporting on system activity, so there is an audit trail. It will be increasingly important to know who made changes to lease data and why. You’ll also want a record of when transactions are posted and by whom.
Security has always been an important lease accounting consideration, but new mandates make it even more of a concern. AMTdirect conducts SSAE 16 audits and offers three-factor authentication to ensure that your system is accessed by only those authorized to do so.
Of course. blumshapiro, in collaboration with AMTdirect, offers many flavors of implementation and support. You may not know from the beginning how much help you will need implementing and getting ready to comply with the new standard. Most vendors will provide technical implementation services, but the best partners also have a team that can help with lease abstraction, data migration and operational consulting. We’re ready to support you in the capacity that meets your project plan.
blumshapiro is presenting this series of articles in collaboration with AMTdirect, a North Carolina-based software provider that offers the most robust lease administration and accounting compliance technology on the market, helping clients organize and manage real estate and other contracts while complying with the complex new FASB ASC 842, IFRS 16, and GASB lease accounting standards.
blum is the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with a team of over 450, offers a diversity of services, which include auditing, accounting, tax and business advisory services. blum serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.
If you have questions or require further clarification, please contact Jennifer Hogencamp, Leasing Implementation Leader at 401.330.2735 or firstname.lastname@example.org.