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Consequences of Not Being Proactive on Lease Accounting Standard ASC 842

July 21, 2022

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The fact that business is ever-changing is not new or novel, but most agree that the pace of change is only increasing. Now more than ever, business leaders need to be proactive about unforeseen developments and shifting landscapes. One such shift that requires financial leaders to be ahead of the curve is accounting and financial reporting pronouncements, particularly those that have significant impacts on financial results. For the current year, 2022, none looms larger than ASC 842 Leases.

Anyone involved in the financial world knows that changes to lease reporting have been coming for more than a decade. If your company is a calendar year end, did you know that you were required by FASB to have implemented the new standards on January 1, 2022? For most private companies, the time is not sometime down the road….it is right now…really six months ago, in fact. Is your company behind? There have been accounting and reporting pronouncements that could potentially be tackled at year end but leaving the implementation of ASC 842 to the last minute can lead to headaches and heartburn.

Does your company have any covenants (debt, investor, etc.) that need to be met monthly? Quarterly? Or annually? If so, neglecting ASC 842 implementation could in serious frustration from your lender or investors about the impact of ASC 842 since the implementation could result in very different financial information.

Are you thinking that implementation might be easy?  So, you’ll cross that bridge when you come to it? It might be simple, depending on your current leasing portfolio – or it might NOT. The accounting and reporting of leases is becoming vastly more in-depth and complex. Do you have escalating rent on any of your leases? Have you had any rent forgiveness on any of your current leases? Do you carry deferred rent on your balance sheet? How will you account for tenant improvement allowances you are afforded? Do you know at what rate you should discount the future cash outflows? Have you thought about the entries for each month? Are you prepared to calculate weighted averages of years remaining on leases and discount rates? Is your team ready to calculate the effective interest method each month? All of these questions have answers, but each is a complication that needs to be thought through.

One thought might be that not implementing ASC 842 could be a route forward. For some companies, that option might be an option. The issue of not choosing ASC 842 implementation, however, is that your financial statements would not be in compliance with Generally Accepted Accounting Principles (“GAAP”). If your company is audited, that would result in a qualified opinion. Qualified opinions can raise serious red flags for lenders and investors and generally mean that the numbers reported are not reliable.

Lastly, there is a stress and financial implication to consider. If implementation is pushed off until wrapping up 2022, there will likely be a fire-drill to implement for year-end reporting. That can obviously result in stress and longer hours and a project for you and your team that might land at the wrong time. Closing the books is project enough as it is and avoiding unnecessary stress on teams is always better than the alternative. Leaving implementation to year end close would be like never once thinking about or adjusting any fixed asset accounts all year and trying to do it in January. This has the additional curveball of being all new types of calculations to most everyone. If the project is bigger than you think, it could cause you to miss lender reporting deadlines, which is obviously not ideal. Increased costs are a very likely outcome for any company that finds itself overwhelmed or behind the eight-ball on any project.

The motivational speaker John C. Maxwell once said that “If you’re proactive, you focus on preparing. If you’re reactive, you end up focusing on repairing.” Implementing ASC 842 might be a great example of a situation when this quote could apply. If you have leases in effect during 2022, start the process of implementation right now if you haven’t already.

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All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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