ASC 842 Compliance: Keys to Success, Lessons Learned

2 min read
August 15, 2018
CoStar Real Estate Manager Blog

ASC 842 Compliance: Keys to Success, Lessons Learned

As the deadline quickly approaches for the new lease accounting standard ASC 842, a scant 1 percent of companies have completed the requirements necessary to meet the unique requirements according to a recent PwC survey.  The deadline for public companies is December 15, 2018, and private companies must do the same one year later.

In addition, the PWC survey revealed that 95 percent of public company respondents reported that adopting the recent accounting changes was difficult.  While there’s no doubt ASC 842 is a challenging journey, there are four steps proven to guide companies in the right direction.

Step 1:   Get the Lay of the Land

Do a complete survey of your lease accounting landscape, identifying strongholds and weaknesses.  Lay the groundwork for efficient implementation by compiling a detailed catalog of existing leases and business requirements.  Any information gaps should be determined during the lease review of all real estate and non-real estate leases. According to the survey published by PwC, 60 percent of the companies reported difficulties identifying their lease population.  Survey results showed that many organizations must collect and manage data from thousands of leases and related documents, such as amendments, schedules, and asset listings.

Cross-functional team to ensure departments across the company are represented, including real estate, maintenance, logistics, IT, Legal and Accounting.  It’s also essential to engage and educate all project stakeholders during this phase of the process. More than 70 percent of PWC survey respondents with public companies rated human capital/resource requirements as somewhat or very difficult, making it among the most significant challenges to achieve lease accounting compliance.

Step 2:  Map a Clear Path

Once you’ve identified your starting point, it’s time to plot your course.  One major crossroads: Deciding whether to invest in a new software system.   More than 50 percent of public companies and 25 percent of non-public companies expect significant software system changes while adapting to the new lease accounting standards, according to information published by PWC.

Leverage the knowledge of the cross-function team formed during Step 1 and gather the requirements from all stakeholders.  Ensure the evaluation process is thorough by developing a list of test scenarios that can be used to verify system functionality.  Also, ensure the new software can readily integrate with existing ERP and IWMS systems.

Step 3: Look for Opportunities Along the Way 

Organizations that look beyond the primary goal of meeting lease accounting compliance will be rewarded with opportunities to improve on business as usual.    In addition to sweeping changes, look for opportunities to improve practical micro processes needed for day-to-day business, such as lease versus buy models. While evaluating software, look for opportunities to improve standardization, centralization and automation.

Step 4:  Charge Ahead

When Steps 1 through 3 are done carefully, businesses have the confidence and know-how to focus on execution.  While minor detours and roadblocks will present themselves, companies will be well-equipped to complete the journey to lease accounting compliance before the deadline.

Accountability and communication are also crucial for successful project implementation.    During the testing and implementation stage, it’s vital to keep an open line of communication amongst stakeholders and share all good and bad insights. All members of the project team should have clearly defined tasks and deadlines.

In sum, the clock is ticking for both public and private companies to add virtually all leases to the balance sheet.  However, if done right, the benefits will reach far beyond accounting standards compliance and allow businesses to gain operations efficiencies and provide visibility into spending patterns around leases, resulting in significant savings. Ultimately, the keys to success include understanding and developing accounting policy and careful project planning.