Private companies falling short on lease accounting standard
By Michael Cohn
Approximately 40 percent of private companies are behind schedule on implementing the new lease accounting standard or haven’t started getting ready yet, even though the implementation deadline is approaching, according to a new survey.
The deadline for most U.S.-based private companies to adopt the new standard is next January, and many of them launched the transition project early this year. The survey, by the lease accounting software provider LeaseAccelerator, found that 12 percent of the 350 finance and accounting leaders it polled from U.S.-based private companies indicated they have already completed the project.
Those that have completed the transition include private companies that are planning IPOs in the near future or are in the process of being acquired by a public company. There are also some privately held companies that have registered securities or are SEC filers and so must follow the deadlines for public companies, which had to begin abiding by the standard last December. Around 48 percent of private companies surveyed indicated they were on schedule or ahead of schedule. However, some companies may be underestimating the work effort left before they are required to comply, much like their public company counterparts did before they were required to begin complying last December.
When asked to compare the lease accounting standard to the revenue recognition standard that has already taken effect, 75 percent of the private company executives surveyed are finding the new leasing standards to be more complex or as complex, Nearly 55 percent of the companies polled are finding the lease accounting project to be more complex than originally anticipated. Collecting data, modifying business processes, and project-managing the enterprise-wide effort are the top three challenges they cited. Over 60 percent of private companies have formally assigned a project manager from the accounting or financial reporting team to lead the project.
More than 40 percent of the survey respondents said they have taken an inventory of their enterprise-wide lease portfolio. The most challenging leases to analyze are not real estate contracts, but IT, fleet, plant, machinery and equipment leases.
Only 20 percent of the respondents indicated their companies have now selected a software vendor to support the new lease accounting standards. More than 50 percent plan to use spreadsheets.
“Private companies will benefit from having an extra year to prepare for ASC 842 as they can learn from the real-world experiences of public companies that are adopting throughout 2019,” said LeaseAccelerator CEO Michael Keeler in a statement. “As private companies continue their efforts to meet the deadline, they should be mindful not just of ‘Day 1’ considerations, but also of the need to set up scalable business processes for sustained compliance. Ultimately, success with lease accounting will demand an enterprise-wide effort to regularly communicate changes to the portfolio across business units, corporate functions, and the accounting team.”