1 in 5 private company executives do not feel prepared for accounting for leases
With a few months from the end, private organizations must include most leases on their balance sheets for years beginning after December 15, 2021 (i.e. calendar periods starting January 1, 2022), a fifth (19 , 8%) of private companies the leaders of the owned organization still do not feel prepared to comply with the Financial Accounting Standards Board (FASB) rental accounting standardDeloitte survey
The good news: 27.7% of those surveyed feel ready to comply – the highest level of confidence among executives of private entities in six years.
“In response to the disruptions of the COVID-19 pandemic, the FASB acted quickly in early 2020 and provided a optional additional year for private companies and private non-profit organizations adopt the accounting standard for leases. Our survey data at the suggested time that 63.8% of managers of private companies planned to take advantage of the extension,” mentionned Tim kolber, Chief Executive Officer and co-director of accounting standards implementation services in the Audit and assurance practice of Deloitte & Touche LLP. “The adoption of the FASB lease accounting standard is mandatory, so I hope organizations are focusing on it closely now.”
Sean Torr, Deloitte Risk & Financial Advisory Managing Director and Controller – responsible for accounting and reporting, Deloitte & Touche LLP added: “Some organizational changes made during a pandemic disruption have implications for lease accounting, not the least of which are not migration to the cloud and real estate footprint changes. Whether managers of private entities are among the particularly high rate of those who do not feel prepared to comply or not with the accounting standard for leases, the time has come for these managers to start asking questions about status of implementation efforts. “
The following questions can help private organizations assess how close they are to completing their lease accounting implementation efforts:
- On rental portfolio
- Has your organization changed its leased real estate footprint? Following the disruption of the COVID-19 pandemic, some organizations are reducing their real estate footprint, expecting employees to work remotely for the foreseeable future or for other business reasons. Should an organization terminate a lease before the end of the contract, modify existing leases, or execute a sale-leaseback transaction:different accounting treatments are necessary.
- Is your organization planning to migrate to the cloud? Has he done so recently? As organizations adopt the FASB cloud computing accounting guidelines, the way they adopted the lease accounting standard could provide opportunities for structuring cloud agreements for specific accounting treatment.
- Have the policies been updated correctly? Aligning rental contract data collection and systems implementation efforts with accounting policies can help reduce complexity, as can creating a process to keep policies up to date with guidance.
- On the people
- Are professionals properly prepared? As with most complex programs, identifying who is responsible for which aspects of lease accounting can be invaluable, especially since some jobs are manual and labor-intensive (e.g. rental, consolidation of reports). Employee communications and training should be developed and tailored for the training of specific and highly involved employee and supplier groups. In addition, leaders across the organization must be frequently updated on progress while communicating to employees the importance of adopting the mandatory rental standard.
- Do external stakeholders understand the implications for the financial statements of the new accounting standards for leases? communicate clearly with lenders and investors about the impact of lease accounting on operations and financial statements can help build goodwill.
- On data and technology:
- How reliable is your organization’s rental data? The first step is to ensure that all relevant rental data is fully centralized, captured and verified for accuracy. Once the rental data is ready for use in lease accounting, check whether it complies with your organization’s accounting policies. Finally, develop a process to maintain rental data in the future, as changes can occur frequently.
- What is the information technology approach planned by your organization? If rental accounting solutions are used, work with IT to define requirements and test them end to end; work to resolve issues identified during solution testing; and discern who will do the manual work necessary to organize the data and information to be entered. Engage rental data end users early and often about new and different ways data should be tracked and used in the future.
Torr concluded, “While some private entities may have as few as 20 equipment and property leases in their portfolios, we still advocate stringency in adopting the standard. Focusing on proper lease accounting should be a top priority for US private companies in the coming months. “