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The Six Fatal Points of Implementation Failure for FASB New Lease Standard

We’ve put together a series of articles that will be a complete resource for the complications, challenges, and trials companies face as they coordinate accounting, finance, IT, and lease administration resources to tackle FASB ASC 842. This article focuses on the implementation failures, focusing on technology, financial impact, time, cross-department coordination, equipment lease and new abstraction requirements.

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We’ve put together a series of articles that will be a complete resource for the complications, challenges, and trials companies face as they coordinate accounting, finance, IT, and lease administration resources to tackle FASB ASC 842. This article focuses on the implementation failures, focusing on technology, financial impact, time, cross-department coordination, equipment lease and new abstraction requirements.

In our last article, “The New Leasing Standards and the Implementation Challenge,” we summarized the new standards for you. In this article, we will share six points of implementation failure for the new FASB lease standard that, if not handled properly, can be fatal to the on-time delivery of a final solution.

New Abstraction Requirements

A current lease management system doesn’t guarantee an easy transition. Many clients assumed they were all set for compliance because they had all their real estate data in an electronic system. Turns out, there are a couple of big surprises when it comes to your data.

First and foremost, the new standard (ACS 842) will require additional lease data that isn’t commonly abstracted today. For example, information like fair market value, whether options/extensions are likely to be renewed, and interest rates (if they are not implicit in the lease), are probably items not currently sitting in your lease admin system. In addition, much of the information needed to correctly classify and calculate leases isn’t even in the lease.

Equipment Leases

Most of the discussion about the new FASB lease standard has been about real estate leases because, in most cases, that’s where most of the balance sheet impact will come from. But our clients have found that most of the work will come from other types of leases like equipment and software. It’s usually corporate finance teams who handle real estate leasing—but equipment leases are done on a department or field level. The most common answer we get when we ask customers how many equipment leases they have is, “I have no idea.” Equipment leases will be a big consideration for most companies.

Cross-department Coordination

One common question is, “Is FASB ASC 842 an accounting problem or a real estate one?” The answer is, “Yes.” Unfortunately, lots of companies have siloed organization systems that don’t typically allow information to be shared. Our clients, who have been successful, made shifts to roles and responsibilities and rolled out technology designed to support a cross-functional structure. To meet this challenge, your team will need to include accounting, finance, IT, real estate, and lease administration resources. And this is no small feat.

Time

Most companies have seriously miscalculated the amount of time required to get ready for ASC 842 compliance. PwC’s recent survey showed that 40% say it will take nine months to complete. From our experience, based upon the number of leases the company has, it can range significantly, but will go much smoother if you are prepared. The point is, you need to allocate resources and time now—because the deadline is approaching fast.

Financial Impact

Financial reporting under FASB guidelines isn’t a one-time event. What companies are realizing is that they need to review their lease negotiation and approval practices to minimize the balance sheet impact. The impact could affect your balance sheet metrics—the return on your assets, debt to equity ratios, taxation and bank covenants. Further, the new rules may change the lease vs. buy decision. And, in some cases, it may make sense to renegotiate existing leases. For instance, leases that have service charges lumped in with base rent present more of a challenge than leases that have the charges separated. You’ll need to run the math in testing to understand the consequences.

Technology

Obviously, there is a significant technology component to the issue—and there have been some difficult lessons learned in that area. Many companies question whether they need a dedicated software or if they can just calculate the entries in Excel. However, we have found that using Excel may set the company up for headaches down the line. Issues start to arise when there is a change in term; execution of an option including terminations, kick-outs, or renewals; change in amount of a FASB-related charge after initial period; and receipt of TIA payments. These matters happen all the time, yet the accounting for them and the adjustments—which are simple in software—are much harder in Excel. Don’t fall victim to taking the easy way out in year one!

Stay tuned for our next Leasing Series article where we will discuss costly misconceptions of FASB ASC 842 implementation.

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