Private companies and nonprofit organizations might have heaved a sigh of relief when, thanks to COVID-19, the deadline for the new ASC 842 lease accounting standard was extended (again). But if you haven’t already done so, it’s now time to shift back into higher gear.
Back in 2019, non-public entities got a one-year reprieve for adopting the new standard, when the Financial Accounting Standards Board (FASB)—recognizing the challenges public companies were having with implementation—gave private companies more time to prepare. In June of 2020, they pushed out the deadline for a second time, as the coronavirus pandemic shut physical offices down, and companies faced a whole new set of challenges.
Preparing for a Successful ASC 842 Implementation
With an additional year to get ready, the sense of urgency may have eased, but as we’ve said before, “This will take longer than you think.” Here’s why.
- Software selection. For companies with more than a few leases, new software will likely be required to manage your leases and perform complex accounting entries. A thorough consideration of business requirements and diligence process around software selection can ensure the right answer for your company. And if you have fewer than 50 leases, a managed service solution might be a simpler, cost-effective solution.
- Data collection. 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.
- System implementation. Lease systems are effectively sub-ledgers to your ERP system. You need to decide whether they will be fully integrated into your ERP or not. Either way, you’ll need a partner with the experience to support your ultimate decision.
- Change management. 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.
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 (4-6 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 portfolios will need additional time to abstract required information from leases and to configure and test systems.
Lease portfolio size and complexity. Every lease portfolio is unique. Greater lease portfolio complexity will impact the timing of almost every phase of the project, with some portfolios requiring additional effort to comply. Some notable drivers include:
- 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
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|
Building a Successful Roadmap
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 an experienced partner who can lead you through the process and provide:
- Established program governance and reporting capabilities
- Technical and integration configuration oversight
- Vendor management
- Project and change management
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.
Need help getting started? Let’s talk.
Editor’s note: This article was originally published November 6, 2019 and has been updated to reflect FASB’s extension of the deadline for adoption.