By Ane Ohm
No one could have predicted the year we just went through in 2020. COVID-19 changed the way businesses operate around the globe and upended personal and professional plans. We managed the sudden changes quickly and as best we could. Now, with 2021 here, we must begin to prepare for something we’ve known was coming for some time: implementation of the new lease accounting standard for nonpublic companies.
In May 2020, the Financial Accounting Standards Board (FASB) postponed the new lease standard implementation date for nonpublic companies to fiscal years starting after Dec. 15, 2021. This comes after a 2019 decision to delay as well.
I am confident that we will have a new lease standard effective in 2022. With ASC 842 implemented for public companies, financial-statement users need nonpublic adoption for comparability purposes. At a September 2020 FASB roundtable, participants all indicated that major changes to the lease standard are unnecessary, while greater clarity and flexibility on certain topics would be helpful.
Despite the delays, the FASB is still focused on easing the transition and ultimately achieving comparability. The FASB started holding roundtables to collect feedback from the preparers, reviewers, and users of financial statements. As noted above, participants have expressed that they don’t want to overhaul the entire lease standard; instead, they want more clarity and flexibility around issues like determining the discount rate or modifying lease terms.
The FASB has taken the feedback and begun to update its guidance accordingly. Recent changes reflect how the FASB is using this time during the delay to listen to concerns from public companies while doing whatever it can to ensure a successful nonpublic implementation.
At the December FASB board meeting, members discussed a continued willingness to issue further guidance. Potential topics include setting discount rate policies by asset class and amending the risk-free rate practical expedient to something more representative, like AAA bond ratings. Offering industry-specific training was also discussed, with an acknowledgement that this will become more relevant and attractive as the implementation date approaches.
In my conversations with CPA firms this year, I’ve heard a lot about how they expect to deal with lease revisions for the next few years. Even after the pandemic subsides, the way we work will have likely changed forever. Businesses realize they don’t need the real estate and equipment they thought they did. This has already created a lot of work around lease revisions.
Fortunately, the FASB issued guidance early on to help ease some of the stress around these changes. For instance, if a client needed to change a lease due to the coronavirus—like a landlord offering temporary relief while a business was nonoperational—this can be considered a lease concession rather than going through an extensive analysis to determine if it was a lease modification. We’ll watch and see how the guidance evolves.
Show your clients how you are preparing to help them with the transition. Let them know that you are already thinking about this issue in advance so, when they’re ready, you’ll have a solution in place that will make implementation simple and easy.
Here’s a rough procedure for how you can keep implementation top-of-mind for clients:
While most clients won't start adopting the new lease standard until late 2021 or into 2022 (or even early 2023), they should talk to their banks early about the structure of their debt covenants and the potential impact of implementation. They should also start tracking their leases and centralizing lease documents, which will be important for implementation. Identifying embedded leases now will also make this process much easier.
Ane Ohm is CEO of LeaseCrunch, a cloud-based lease accounting software company in the Greater Milwaukee area. She can be reached at ane.ohm@leasecrunch.com.
You can learn more about the new lease accounting standard at PICPA's Accounting and Auditing Conference on Dec. 9-10 at Penn State Great Valley in Malvern.
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