Now that the Financial Accounting Standards Board (FASB) formally approved a delay in implementing lease accounting for private companies, are you wondering what this means for your organization?
Regardless of the extended deadline, it will take longer than you think to comply with the new ASC 842 standard.
In a recent blog post, our VP of F&A, Michael Allen outlined why private companies should create an action plan now to meet the deadline and better position themselves to defray the costs associated with adoption.
In doing so, private companies can learn from the experiences that public companies have reported. In a letter requesting the delay, the American Institute of CPAs (AICPA) identified many of those challenges.
- Public and private companies alike have found it difficult to locate all their lease contracts, identify embedded leases in other contracts, and extract the data needed to comply with FASB’s rules.
- The extent and magnitude of the change could be significant in lease-intensive companies, including potential changes to internal controls and systems for capturing contracts.
- Public company clients are struggling with adoption, and those entities have more resources than most private companies.
What Should Your Roadmap Include and How Long Will It Take?
The typical roadmap for implementing the lease accounting standard spans 12-14 months, comprised of the following phases:
- Policy and process design (3-4 months)
- System selection (2-3 months)
- Lease data collection (3-4 months)
- Implementation (2-4 months)
Given the project duration, adhering to a strict timeline is essential to stay on track. There are several factors that impact the length of the various stages. Some notable drivers include:
- Lease portfolio size and complexity. Every lease portfolio is unique. Portfolios with the following characteristics, typically require additional effort to comply:
- Variety of lease types (operating vs. capital, real estate vs. equipment, embedded lease, variable payment leases)
- Lessor needs in addition to lessee
- Multi-national entities with in-country reporting requirements and multiple accounting standards
- Numerous leases that require tracking of both lease and non-lease components
A portfolio with a variety of characteristics will need additional time to abstract required information from leases, system configuration and system testing. Greater lease portfolio complexity will impact the timing of almost every phase of the project.
- Lease administration requirements. Is the project scope focused only on accounting compliance? Or does the project include streamlining lease administration? As companies evaluate scope, other organizational requirements may be beneficial to address. Our clients are finding significant benefits with aligning lease administration and lease accounting teams onto a common platform.To ensure adherence to overall timelines, at the project start, determine which objectives are in scope and establish priorities through a defined rollout strategy.
- Size and complexity of the Day 2 operation team. A variety of project tasks are affected by the sheer number of individuals involved in the project. Some of those tasks include requirements gathering, system evaluation input, process discussions, user testing and training. As you begin to consider Day 2 processes and identify potential process changes across teams, factor in the time to address these new team interactions. For instance, how will the accounting team interact with lease administration teams to capture new leases or lease modifications? Set aside time in the plan to document information flow, test new process interactions and provide training to teams impacted.
- Vendor negotiations. This is easy to overlook. Be sure to allow time to set up contracts with required vendors, including your software provider and other partners. Ensure the roadmap reflects the timing of your procurement process including:
- Vendor demos
- Vendor evaluations
- RFP process and contract negotiations
From initial demo to final contract, these steps can take months depending on the organization and how your purchasing decisions are made.
Mapping Project Phases and Dependencies
Having factored in the considerations above, what does a roadmap look like and what are some of the key dependencies?
|Policy and Process Design|
|Data Collection/ Abstraction|
A successful roadmap will take into consideration the dependencies between the major phases of the project. For example:
- Project objectives. Align project objectives across stakeholders at the outset to avoid scope creep later in the project.
- Lease identification. Address lease portfolio completeness early to streamline data abstraction efforts and policy decisions
- Business requirements. As the policy and accounting changes begin to mature, identify and document key requirements for accounting and administration objectives.
- Data readiness. The data required for compliance is directly dependent on accounting policy decisions, lease administration needs and system selection.
- System design. An agreed upon set of final business requirements allows for a smooth transition into the system design and implementation.
Once your roadmap is complete, make sure all your careful planning pays off with solid project and change management. Through strong overall governance, technical and integration architecture oversight, vendor management and a roadmap coupled with the right team you’ll be on track for success.
Need Help Getting Started?
RGP has helped hundreds of public companies implement the new FASB standard—experience we now bring to support private companies. From roadmap planning and process design to change management, our team can help you throughout every step of the journey to compliance. Contact us to learn more.