By Greg Heller
April 25, 2019
Lease accounting used to be a Wild West of off book expenses. The culprit? A loophole in the Generally Accepted Accounting Principles (GAAP) set forward by the U.S. Securities and Exchange Commission. But in early 2016, the Financial Accounting Standards Board (FASB) established a new set of rules regarding lease accounting, named Accounting Standards of Codification Topic 842 (ASC 842). The intent behind these new laws was closing that loophole.
For the past 40 years, companies haven’t needed to put operating leases on their balance sheets. And in 2016, the FASB decided to change that. Because, while it would be a large undertaking for most companies, it would also increase transparency and make it easier for the FASB to compare them by their financial statements. How did these businesses adapt to the additional work of adding anything with a lease term longer than a year, including: equipment, properties, vehicles, etc? Not very well.
As of this survey conducted in October of 2018, only 4% of public company survey respondents could be called ASC 842 compliant. And, while 76% claimed to be halfway done, the fact that it took two years to get there is not going great.
The non-public respondents are hardly doing better, with 63% still in the initial ASC 842 assessment phase. And 28% of those haven’t even started. Of these non-public companies, 78% weren’t even halfway done with the first phase.
All of this is somewhat understandable, because treating all leases as capital leases instead of operating leases is a huge shift in process (not to mention other law changes they may currently be dealing with). The difference between the two is essentially administrative burden. Operating leases are expenses that don’t go on the balance sheets. Capital leases, on the other hand, are reported on the balance sheet like any other asset. And with that shift comes the need for a new process. Gearing up for the shift requires:
Even after a company achieves compliance with the new standard, the administrative burden doesn’t go away. Every new lease will require additional record-keeping and tracking – work that finance teams have to perform.
Well, public companies were to have this new standard implemented by December 15 of last year. Private companies have a slightly longer deadline of December 15 of this year. Private companies were given more time, as they have less stringent financial reporting requirements than public companies. Which means they only have more to clean up now.
Of course, much of this depends on whether your company is public or private. If your company is public and still has lease work to do, your company could be facing considerable penalties from the SEC. This may cause further damage, as investors could lose confidence and search for more secure options.
If your company is private, you still have time. You also won’t be facing the issue of stock market uncertainty and peevish investors. But you could still face serious adverse business effects if you aren’t ASC 842 compliant by the deadline.
Either way, the less leases you have, the easier the transition process will be. A great place to start minimizing your leases is your vehicle program.
If you have a company-provided vehicle program that operates with leased vehicles, now may be the time to review other options. Even if its just to understand what they are and how they compare with your current program. Beyond the administrative work of adding these leases to the balance sheets, there are other benefits to switching from a fleet of company cars. Find out more in this piece, The Benefits of Switching from Fleet to Vehicle Reimbursement.
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