Practical steps for meeting ASC 842 and IFRS 16 compliance requirements
by Matt Waters
Many accounting professionals have been dreading the countdown to the new year, as the deadline to implement ASC 842 and IFRS 16 compliance standards is often described as “Go Live by December 31, 2018.” Numerous companies are concerned they won’t make the deadline and need direction on next steps. Here is a straightforward guide to identifying the common pitfalls faced and the realistic options available for successful compliance at this stage in the process.
Roadblocks to Compliance by December 31st
Failure to meet the year-end deadline may be attributed to a number of factors. Many companies under-estimated the complexity of their lease portfolios, the volume of equipment lease data, the quality of their lease data or the overall organizational impact of the project. Other factors, such as personnel turn-over and lack of internal support may have led to other unforeseen issues, such as a delay in necessary accounting policy decisions.
No matter what the issue, companies concerned about missing the December 31st deadline need to address the following three questions:
- What Go Live options are available for accounting and financial reporting?
- What adjustments are needed for month-end and quarter-end close?
- What happens if Go Live goes beyond Q1, 2019?
Companies evaluating project schedules and the system Go Live requirements need to fully understand the realistic options available to achieve compliance. Whether the issue stems from starting too late or facing unforeseen challenges, there is still an orderly path to success through process management, reporting and compliance. The steps outlined below serve as a practical guide for those behind in project implementation, broken out by anticipated Go Live periods.
Go-Live before January 1, 2019
No doubt, careful planning and project execution have paid off for companies with a successful Go Live before year-end. These organizations are well-positioned for compliance in Q1, 2019 given the fulfillment of the items outlined below:
- 842 Amortization Schedules: Create and approve prior to 1st close period
- 840 Journal Entries (month end close): No longer necessary. Zero out deferred rent as a part of transition.
- 842 Journal Entries (month end close): Post at month end
- Balance Sheet Reconciliation (month end close): Perform using Accounting Summary Report from your application
- Disclosure Report: Available when needed from your application
- Internal Controls: Document regarding the 2018 project and in place for monthly tasks
- 2018 10K (SAB 74): Best scenario for SAB 74 as quantitative disclosures will be complete prior to 10K filing
- Re-work Required: None
Adjusted 1: Go Live within Q1 and prior to quarter close.
This process is applicable to companies that anticipate missing the December 31st deadline but plan for the Go Live to occur during Q1, 2019 in advance of quarter close. Companies in this position can follow this process to achieve compliance:
- 842 Amortization Schedules: Create and approve ASAP during Q1
- 840 Journal Entries (month end close): Book until 842 schedules are ready. Zero out deferred rent as a part of transition
- 842 Journal Entries (month end close): Post as soon as possible. Support 840 entries in Q1 by one of these options:
- Option 1 (recommended) – reverse 840 JE’s and correct with 842 as of day 1 (record all JE periods applicable year to date in 1st integration run)
- Option 2 – posting opening entries when the schedules are ready during the current month. 840 entries remain
- Balance Sheet Reconciliation (month end close): Transition from 840 to 842 method when possible. Performed using Accounting Summary report from CoStar after transition
- Disclosure Report: Available when 842 schedules are final
- Internal Controls: Document for 842 project, cutover and go forward process
- 2018 10K (SAB 74): Quantitative disclosures might be complete prior to 10K filing
- Re-work Required: Some – depending on journal entry option
Adjusted 2: Go Live after Q1 close, before disclosure.
This process is for businesses that plan a Go Live after Q1 2019 close but before the deadline for the quarterly disclosure (between 4/1/2019 – 10Q deadline). Compliance can be achieved by following this process:
- 842 Amortization Schedules: Create and approve after Q1 close
- 840 Journal Entries (month end close): Book for entire Q1. Zero out deferred rent by manually booking adjusting entry to opening ROU asset
- 842 Journal Entries (month end close): Post for ROU Asset and Lease Liability at the end of P3 with offsets to deferred/prepaid rent (display approach). Entries can be top-level summary entries and will probably need to be auto reversing
- Balance Sheet Reconciliation (month end close): Finalize reconciliations under 840, then use to support entries for display approach and then perform recs under 842 using the Accounting Summary report from CoStar
- Disclosure Report: Available when 842 schedules are final and may be used to support the entries and balances associated with ASC 842
- Internal Controls: Documented for 842 project, temporary display approach method, cutover and go forward process
- 2018 10K (SAB 74): Quantitative disclosures probably not complete prior to 10K filing. Recommend accelerating Go Live for the most material portion of the lease portfolio to validate any statements regarding ASC 842 impact
- Re-work Required: All of Q1 would be re-worked at the detailed lease level ASAP in Q2, and “Adjusted 1” method would then be used in Q2
Following the steps outlined above and working with a proven software solution will ensure successful compliance and bring you one step closer to a happy, prosperous new year. But remember, compliance with new lease accounting standards is an ongoing commitment. While the short-term solution might be good enough to meet initial compliance deadlines, companies need to ensure the longer term solution is well-communicated amongst stakeholders and consistently applied.