As public companies rush to comply with the end-of-year 2018 deadline for ASC 842 and IFRS 16 lease accounting requirements, the threat of potential impact of a restatement to financials loomed if initiative was not completed on time. As part of the overall lease accounting compliance initiative, a thorough risk assessment should be undertaken. This exercise can also help with the resource allocation necessary for a project of this scope.
Here is an overview of the potential impact a restatement of financials may have on public companies which miss compliance deadlines.
Two types of restatements: Big R versus little r
The type of restatement depends on what caused the error, the overall significance of the error and the likelihood of it reoccurring.
Restatements are nicknamed “Big R” when the error is material to prior period financial statements. In that case, the company is required to correct the error and restate the previously issued financial statements.
In contrast, “little r” restatements are not material to the prior period financial statements. In this case, it is important for companies to explain the nature of the error and the correction to investors. In a little r scenario, the company would need to disclose the correction in the footnotes of the current period financial statements.
Financial impact of restatements for public companies:
There are significant risks associated with restatements, as the process can be expensive and resource-intensive. In addition to the necessary forms and reporting requirements, attorneys are needed to identify and address potential legal issue and consultants are necessary to identify and mitigate damage done by the issues.
Restatements also opens the door to other negative consequences such as increased scrutiny during the audit process. When errors are detected, it is important for companies to be transparent and communicate the measures put into place to prevent a similar error from happening again.
The other important “r” that needs to be address during restatement is the company’s “reputation.” It’s impossible to underestimate the importance of proactive communications with investors regarding a restatement. Failure to do so is likely to increase concerns about potential weakness in the company or its leadership, which could be symptomatic of additional problems down the road. In short, it’s best to allocate the resources necessary to meet the upcoming lease accounting compliance deadline, as failure to meet the deadline will require additional resources and have very negative impact on investor relations. Companies without the in-house resources necessary for implementation should partner with an experienced lease accounting software provider that can offer a full suite of experienced consulting, lease data and project implementation resources.