By Allison M. Henry, CPA, CGMA, PICPA vice president – professional and technical standards

The economic havoc wrought by the COVID-19 pandemic and the related recovery work has overwhelmed practitioners and significantly affected nonpublic entities. Most practitioners have not even begun to think about training and implementation regarding ASC 842, Leases. Yet, the effective implementation date of ASC 842 for private companies is Jan.1, 2022.

For many entities, implementing ASC 842 will result in a significant shift in accounting policies, which will have a material impact on financial statements. Implementation will require businesses to potentially invest considerable time and resources in gathering the information needed for the transition, establishing controls over the collection of leasing information, evaluating contracts, defining the components, searching for embedded leases, remeasuring initial direct costs, identifying the interest rate, determining the implementation method and which practical expedients to use, and devising processes for reassessing the lease period and interest rates – not to mention the impact on debt covenants and the time and effort needed to work with lenders to potentially obtain waivers or modifications.

The PICPA’s Accounting and Auditing Steering Committee has petitioned the FASB for a two-year deferral of the effective date of ASC 842 (see the text of the letter below or download a pdf), but we need your input. 

Please support this effort by adding your signature to PICPA's petition.

Letter to Richard R. Jones, Chair of the Financial Accounting Standards Board, dated Sept. 14, 2021

Re: Deferral of the effective date of ASC 842, Leases

The Accounting and Auditing Steering Committee (the committee) of the Pennsylvania Institute of Certified Public Accountants (PICPA) appreciates the opportunity to provide feedback on the implementation of ASC 842, Leases. The PICPA is a professional CPA association of more than 20,000 members working to improve the profession and better serve the public interest. Founded in 1897, the PICPA is the second-oldest CPA organization in the United States. Membership includes practitioners in public accounting, education, government, and industry. The committee is composed of practitioners from both regional and small public accounting firms, members serving in financial reporting positions, accounting educators, and peer reviewers. The PICPA administers the peer review program for firms in Delaware, New York, Pennsylvania, and the U.S. Virgin Islands.

The input provided here is not associated with a specific due process document. Rather, the committee would like to petition the FASB to delay the effective date of ASC 842, Leases, for nonpublic entities.

The COVID-19 pandemic has significantly affected nonpublic entities (including not-for-profit organizations), straining their viability and decimating their balance sheets. Practitioners in public practice also have been challenged by the added workload of managing government pandemic assistance, performing attest work remotely, and implementing ASC 606. In that regard, the committee would like to thank the FASB for its decision to defer implementation of ASC 606 for certain entities and ASC 842 for nonpublic entities. Businesses and not-for-profit organizations now face the difficult task of rebuilding while practitioners need to tackle their significant backlog of work.

For many nonpublic entities, implementing ASC 842 will result in a significant shift in accounting policies and will have a material impact on financial statement presentations. Implementation will require businesses to invest considerable time and resources in gathering the information needed for the transition, establishing controls over the collection of leasing information, evaluating contracts, defining the components, searching for embedded leases, remeasuring initial direct costs, identifying the interest rate, determining the implementation method and which practical expedients to use, and devising processes for reassessing the lease period and interest rates, among other challenges.

Because the implementation of this standard will significantly affect financial statements, time will be needed to review the impact on debt covenants and to work with lenders to potentially obtain waivers of noncompliance caused by the implementation of the new standard or to modify debt covenants. These waivers and debt covenant modifications can be costly. This effort will likely be even more onerous due to the pandemic since many entities had to obtain new sources of financing to survive. The additional debt could challenge the entities’ debt levels even before applying ASC 842. Starting a process now to renegotiate financial covenants could put the entities at risk of having existing debt called, reduced, or rescinded, potentially pushing many toward bankruptcy.

Training on the new standard is another concern. For many private companies, their auditors are a primary source of information about new accounting standards. Due to resource constraints (people and money) and COVID protocols, much of the training for this topic has been delayed. Without proper training, significant independence issues could occur.

Entities with a significant number of leases will need additional lead time to evaluate, select, and implement leasing software.

Given the significant effort needed to implement ASC 842 and the remaining financial burdens and labor shortages that nonpublic entities are facing, we believe an effective date of fiscal years beginning after Dec. 15, 2021 (Jan. 1, 2022), is untenable. The committee respectfully requests that the FASB approve a two-year deferral of the effective date of ASC 842 to help practitioners and businesses work through their remaining pandemic-related challenges and have a reasonable period of time for effective implementation.

In the absence of a deferral, we believe that many nonpublic entities will opt for GAAP exceptions, which could impact their ability to obtain capital. This is not a good outcome when most private companies are in a capital preservation mode. Others may simply abandon U.S. GAAP for other special purpose frameworks, which we believe reduces the relevance of GAAP and harms the overall economy and capital markets. Peer reviewers also will be challenged and will likely identify many nonconforming engagements, further straining the accounting ecosystem.

We appreciate your consideration of our requested deferral of ASC 842. We are available to discuss any of these comments with you at your convenience.

Sincerely,

Vanessa A. Zang, CPA
Chair, PICPA Accounting and Auditing Steering Committee
CC: Candace Wright, Chair - Private Company Council

ASC 842, Leases, will be a topic of discussion topic at PICPA's 2021 Accounting & Auditing Conference. The fully virtual event will be held Dec. 9-10.

Sign up for weekly professional and technical updates from PICPA's blogs, podcasts, and discussion board topics by completing this form.