How many times have we cancelled our dental checkup because we're "too busy"? Tooth pain reminds us to visit the dentist, who always says, “You should have come in sooner.” The FASB issued a new lease standard, Leases (ASC 842), on February 25, 2016. Are you ready to move forward with implementing the new standard, or do you want to delay until the pain is felt?
The key provision of the new FASB lease standard is that lessees will recognize virtually all their leases on their balance sheet by recording a right-to-use asset and a lease liability. This includes operating leases having previously been recorded off the balance sheet. The existing lease standard has been criticized for failing to meet the needs of users of financial statements, because it doesn’t always provide a faithful presentation of leasing transactions. The new standard proposes to provide for greater transparency in financial reporting. Companies that lease real estate, manufacturing equipment, vehicles, airplanes, and similar assets will be impacted.
Public company implementation dates for the new lease standard are fiscal years starting after December 15, 2018. Non-public companies must comply for fiscal years starting after December 15, 2019. Financial executives may look at the implementation dates and be inclined to focus on projects with more immediate due dates and address the new lease standards later. Financial executives can devote some time now to analyze the potential complexity of the implementation and the impact on company resources. The analysis can help a company decide when to move forward with the implementation process and avoid unnecessary financial reporting risks.
The AICPA (American Institute of Certified Public Accountants) recommends six steps to an effective implementation of the new lease standard:
At first glance, the six-step recommendation seems simple and manageable. Before we get too comfortable with its simplicity, let’s peel back the onion with a few questions. Do you have technical accounting staff available to spend quality time understanding the lease accounting guidance and determining how it impacts your company? Do you know of all your lease contracts and where they are located? Is your company public, and how do you determine whether to transition with the retrospective (requires restatement of comparative periods in your financial statements) or the modified retrospective method (does not require restatement of comparative periods in your financial statements)? Do you have debt covenants or other legal agreements limiting debt levels or requiring approval prior to incurring additional debt? Do you utilize an IT system to manage your lease records, or do you use Excel or similar process? Have you discussed the impact of the new leasing reporting standards with executive management, the board of directors, debt holders, or other stakeholders?
You may not have answers for all the questions above, and as you move forward with the implementation of the lease standard, many more questions will arise. The implementation process will not be limited only to the accounting staff. Moving to the new reporting standards will be a company-wide initiative with communication and cooperation among several departments, including treasury, legal, facilities management, purchasing, logistics, and fleet management, to name a few. To achieve success with the implementation requires development of a project plan with input from a wide range of functions and requires commitment from executive management.
Companies should view the implementation as more than a compliance project and use the opportunity to create value for their company. Below are examples of opportunities for value that may be identified during the implementation process:
Companies have the opportunity to identify additional opportunities to achieve value beyond compliance. Challenging the organization to always be vigilant in identifying value-creating opportunities in all our daily tasks is critical for continuous improvement.
Mario Hernandez currently serves as the controller at Ranger Energy Services. Prior to joining the team at Ranger, he was the CFO at Express Energy Services, then a Partner at Trenegy where he expanded client services in the accounting and finance space. He has successfully led numerous finance organizations, developing and executing strategic objectives to help entrepreneurial companies grow.
