06 Jan 2023 ASC 842: The Clock is Ticking; Act Now to Remain Compliant
Authored by RSM US LLP, January 06, 2023
The deadline for privately held companies to implement the ASC 842 lease accounting standard is here, and companies need to start planning to stay in compliance. ASC 842 represents the first major change to the leasing standard since 1978. And given the grueling experiences of public companies, the transition will take significant time and resources—more than many companies expect.
With challenges stemming from the pandemic, along with various economic and labor concerns, many companies have understandably put ASC 842 compliance on the back burner. And with multiple deferrals, starts and stops, some may assume (or hope) that another delay may be granted, given the number of private companies that do not have a compliance strategy in place.
But the FASB has made it clear that there will be no more delays. ASC 842 was effective Jan. 1, 2022, for calendar year-ending companies and will continue into 2023 for fiscal year-end companies.
The biggest obstacle many companies face is understanding the effort necessary to change a longstanding process. Companies are ingrained in how they do things, but instead of burying lease information in the footnotes, now it must be included on the balance sheet. There is more of a focus on the necessary data and having the technical accounting accurate and complete.
Many companies may be able to manage leases in spreadsheets if they are static, but that process simply won’t be effective for many companies. Therefore, in most cases, companies will need to establish a new system and processes with the capacity and know-how to manage and account for their current and future leases.
Even for public companies with experienced internal resources, the transition to ASC 842 was a substantial challenge. As it stands now, adoption will be even more difficult for private companies that may lack the internal experience and resources. Some private companies that attempted to take on ASC 842 found they were spending too much time while others spending too little, and neither outcome is optimal when up against the clock. Many companies who took on the adoption and system implementation process now realize the finish line is not in sight, and time has run out.
Simply ignoring ASC 842 is not an option—companies need to get this right quickly. Ineffective lease accounting could result in a host of issues, from missing bank covenants to painful audits and disagreements with your auditors.
Managing the volume of leases and having the necessary resources to make the transition successfully is where many companies will risk failing. With a new standard, it is difficult to decipher how much effort is truly necessary without experienced internal resources. And even then, the road is often difficult. The time is now for companies to get the right advice and help to implement an effective lease accounting approach before it’s too late.
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This article was written by RSM US LLP and originally appeared on 2023-01-06.
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