Overcoming the Top Challenges of Implementing ASC 842 Lease Accounting Standard

As public companies file their first 10-Qs under the new lease accounting standard, private companies are turning their attention to assessing the impacts of, and implementing, ASC 842.  For many companies, the level of effort required will be significantly greater than that required for the new revenue recognition standard (ASC 606).  We’ve found the following workstreams often require significant commitments of time and resources: lease collection and abstraction; system selection, configuration, and implementation; internal control design and assessment; and accounting policy development.  Below are some key challenges we’ve encountered in implementing ASC 842 for public companies:

1. The devil is in the details.  While the overall principle of ASC 842 is straightforward, implementation is extremely nuanced.  For example, more arrangements could be considered embedded leases under the new guidance and, in some cases, value may need to be assigned among both lease and non-lease components of arrangements.  Also, certain failed sale-leaseback transactions under the old standard may achieve sale accounting under the new standard.  And there are significant changes to the build-to-suit accounting guidance.
2. Gaining comfort over completeness can be a challenge.  There are a number of arrangements previously not identified as leases that may now be identified as meeting the definition of a lease or containing embedded leases.  Because many companies do not have well-defined contract management processes, gathering all potential lease contracts can be both difficult and time-consuming.  Unlike ASC 606, there isn’t a defined “ring-fence” around where leases reside within financial statements.  Companies will need to assess all transactions for potential lease implications.
3. Specialized software may be required. Existing systems may need to be modified or enhanced in order to provide the information necessary to drive new reporting and disclosure requirements.  Companies considering using a spreadsheet model should have a plan in place for: handling disclosures; accounting for modifications, terminations, and renewals; allocation among cost centers; workflows and internal controls; and obtaining auditor signoff.
4. This is not just an accounting effort.  Our clients have seen pervasive impacts across the organization, including within IT, Tax, FP&A, Legal, Operations, and Treasury, among others.
5. Think beyond the transition date.  It is important to consider changes to business processes in order to successfully account for and report on leases in future reporting periods.  In many cases the ongoing effort is more significant than the upfront effort.