If you’ve been keeping up with the new lease accounting guidance, you’ll know that these dates have been a long time coming. The FASB first added the new standard to its agenda in 2006. It wasn’t until a full decade later – in 2016 – that ASC 842 was published.
For public companies, the moment of truth has finally arrived. Accountants at private companies can learn a lot from their public company cohorts, who encountered numerous unplanned hurdles on their path to compliance.
Why now’s the time to begin your transition
For non-public entities, January 2020 may seem far away now, but when you factor in unexpected snags, employee vacations and turnover, and your regular day-to-day workload, now’s the time to get the ball rolling.
Revenue recognition and year-end close are both in your rear view, and you’re probably looking for a mental break right now. That’s understandable. Unfortunately, the Boards didn’t give us much breathing room between major standard updates.
After seeing how many public companies were scrambling to finalize their transition at the end of 2018, we strongly advise that you start implementing the new standards now. Many companies found that gathering their lease inventory, implementing software, and determining internal policies took longer than they realized.
Use the tips below to avoid those pitfalls. Your future self will thank you.
1. Start building an inventory of your leases
Completeness of your lease inventory is a crucial component of the compliance picture. We gave guidance on how to develop a comprehensive inventory of your leases in this blog.
To quickly summarize, you’ll need to work with numerous departments across the company, so you need to look at your requisitions process to determine which departments contracts are funneled through. From there, you’ll need to document each lease and its pertinent details in a template (which we offer here).
2. Begin gathering your embedded leases
As part of your lease inventorying process, you will also need to compile your embedded leases. These leases are embedded in service agreements, and require you to assess all of your contracts. There is a practical expedient that says you don’t need to re-evaluate expired or existing contracts, but that assumes you haven’t made any errors in your current assessment.
And that means you need to reassess your contracts to be sure.
If you’re struggling with gathering your embedded leases, you’re not alone. Many companies are overwhelmed by this process. There are some common types of contracts that contain embedded leases, which you can use as a starting point:
- Security contracts often contain leases for equipment, such as scanners or monitors.
- Logistics and transportation agreements may contain language that identifies a specific vehicle to be used solely for your needs.
- Data center contracts may designate specific servers for your company, which could amount to a lease.
3. Start evaluating lease accounting software
Lease accounting software will save you an immense amount of time, but it does take some upfront legwork to get the right solution up and running. If you’re weighing whether or not to start now, consider how you’ll benefit from an early start:
- Give yourself time to thoroughly evaluate your options and find the best one for you.
- Reduce stress during the implementation process.
- Be comfortable using the software well before you need to pull your first post-transition journal entries and reports.
Don’t know where to start with the software evaluation process? Our lease accounting software comparison guide has everything you need to know to get started. Download it here.
4. Download our step-by-step transition guide
This blog only covers the high level steps you need to take to successfully transition to the new standards. For a more detailed walkthrough, download our transition guide. It covers all the steps you need to take for a thorough, compliant transition. Get the guide here.