The new lease accounting standards under ASC 842 are sticky, demanding, and—after multiple delays—most definitely here for all companies, whether public or private when the Financial Accounting Standards Board finally said no more extensions, as Accounting Today reported in November 2021.
This is important for property owners as well as tenants. ASC 842 requires office lessees to recognize assets and liabilities associated with most leases, with potential significant impacts on balance sheets.
With literally years of advance notice to implement the new standard, many have made progress toward compliance. However, the big surprise is how many entities are still struggling, according to a new report commissioned by lease management vendor Visual Lease.
Wakefield Research undertook two surveys on behalf of Visual Lease. The first was of “100 US financial management professionals, with a seniority of Director+ or equivalent, at local, state and federal governmental organizations, including a requirement that their organization needs to adopt GASB 87, between May 26th and June 3rd, 2022, using an email invitation and an online survey.”
The second was of “200 senior Finance and Accounting Professionals [in the private sphere], with seniority of Director+, at Companies of 1,000+ employees” over the same time period.
“Today, nearly all private companies (98%) have started the transition to ASC 842, but one-third (33%) are still not fully prepared to transition to the new standard, which points to the massive pressure organizations are under as they attempt to retroactively learn and organize the details of their leases in advance of their initial reporting period under the new lease accounting standard,” the study said.
This is still a considerable improvement over a similar set of surveys last year in which “a staggering 99% of senior finance and accounting professionals surveyed at private companies acknowledge real fears in potentially misreporting company lease information.”
On the government side, with the equivalent GASB 87, 44% of government entities were “not fully prepared” for the transition “and only 18% of government institutions are at a point where they are considering lease accounting maintenance beyond initial compliance.”
Close to three-quarters of private companies weren’t “entirely confident they know how much their leases cost their business,” which should be troubling. Beyond the inability to meet accounting standards confidently and correctly, it also means these businesses are building financial strategies and trying to do cash management without knowing how much is going out the door. Plus, “93% of private companies and 86% of government organizations say their teams are already stretched thin, making lease accounting even more overwhelming.”
What happens if audits start questioning the financial controls of businesses and securities plaintiff lawyers look for shareholders willing to file lawsuits? We’re probably about to find out.