What are the business risks associated with ASC 842 lease accounting?

2 min read
April 17, 2019
CoStar Real Estate Manager Blog

What are the business risks associated with ASC 842 lease accounting?

The new ASC 842 lease accounting standard offers ample opportunity to improve business operations, increase efficiencies and leverage negotiating power with vendors.  However, it’s important for accountants and project stakeholders to note the risks potentially associated with lease accounting compliance as leases migrate from the footnotes to the balance sheet.

Here are five potential risks associated with lease accounting compliance:

1. Failing to take a holistic view of overall reporting compliance, particularly Sarbanes-Oxley

It seems obvious, but the burden of accurate and transparent reporting goes beyond ASC 842 and needs to be maintained based on other requirements, such as Sarbanes-Oxley. The huge administrative burden these represent should not be underestimated. When shopping for a lease accounting compliance software solution, look for effective controls and procedures for financial reporting meet Sarbanes-Oxley requirements.

2. Ignoring the impact on “lease versus buy” decisions

Some experts have suggested the new lease accounting requirements may influence the rent-versus-buy decisions made moving forward. Until this point, leasing assets such as equipment and vehicles has been a relatively easy solution that offered may benefits. However, with the new administrative overhead associated with reporting, as well as how leases impact the balance sheets, the business may need to weigh the pros and cons of asset leasing in a new light. Input from a cross-functional team is valuable during this decision-making process regarding what’s best for the business. However, leasing as a practice still has many advantages including streamlining end of life and disposal practices.

3. Blindsided by impact on financial metrics

Transitioning leases from the footnotes to the balance sheet is almost certain to have some impact on important financial metrics. It’s important to anticipate those changes in advance to avoid blindsiding company leadership, investors and other stakeholders. Metrics to consider vary by company, but may include: debt covenants, bonus calculations, financial ratios, and the differences between GAAP financials and statutory and tax books.

4. Failing to understand the potential impact on borrowing ability

Along the same theme, avoid any unpleasant surprises associated with your organization’s borrowing ability related to moving leases to the balance sheet. While FASB stated leases on the balance sheet will be shown as operating liabilities rather than debt, the change could negatively impact the ability to borrow money. The best approach is to get ahead of it – after understanding the potential impact to the balance sheet, brief lenders on the anticipated change.

5. Propagating weak lease data management

This maybe a tipping point for organizations getting by with loosely-governed, decentralized lease management.   Scrutiny on the accuracy of lease data will increase with ASC 842 compliance, and it will be more important than ever to have a centralized repository that will help with workflow processes and other quality assurance measures. Compliance may present an opportunity to deploy better lease administration software which can streamline lease details to effectively manage critical dates, financial obligations, insurance requirements, security deposits and more for real estate, equipment and other leased assets.