What do Verizon, Delta Air Lines and Starbucks all have in common? Other than many of their employees like to drink tasty lattes and cappuccinos in the morning, they each have not-so-tasty lease payments that will blow up their balance sheets in 2019. These three companies alone will have collectively over $35 billion in liabilities that will suddenly appear on their balance sheest…over-night. And they aren’t alone. Public companies beginning January 1, 2019 will be forced to recognize over $3 trillion in off-balance sheet lease commitments under the new lease accounting standards of ASC 842.
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 Leases (ASC 842). This ASU, along with IFRS 16 Leases, was a joint effort by the FASB and the International Accounting Standards Board (IASB) to improve financial reporting of leasing transactions by requiring companies to recognize lease assets and lease liabilities on the balance sheet. Although these standards aren’t effective until 2019 (for public business entities with calendar year ends), companies face significant changes. Both lessees and lessors need to evaluate the effect of the new standard on their business processes, financial statements, and internal controls prior to implementation.
We have developed a five-step process (ISARC) to comply with 842. Identify, Scan, Analyze, Retain, and Convert. The first four are data capture steps and only the fifth step (Convert) is an accounting step. Below is a brief summary of the five steps:
- Identify Lease Arrangements: For small companies this should be fairly easy. But for a company having a dozen or more locations, this could be a fairly big project. Backing into lease arrangements from payments recognized on the income statement/statement of cash flow will help ensure ALL potential leases are identified.
- Scan Lease Document: Scan ALL lease docs. Even those not considered to be subject to ASC 842. It is likely that you will want these contracts for other purposes in the future.
- Analyze Lease Terms: Review all leases for relevant terms including dates, payments, underlying asset, indirect costs, value of the asset at inception of lease are just of few of the key terms. We recommend meeting with your CPA/Auditor to discuss what data they would like to see captured in this analysis. They will want to review your methodology eventually. It is best to include them early on.
- Retain Data: Create a relational database to hold the data retrieved from the lease. There will be a temptation to use Excel for this purpose. This is a mistake. Excel is NOT a relational database…and finance and accounting types tend to use it as such. DON’T!! If you are a Microsoft Office user, you can use Access for this purpose. We have built many customized Access tables and queries that are perfect for holding and then retrieving key data on your leases. We recommend sending periodic reports to your CPA/Auditor as the project progresses towards completion.
- Convert to Journal Entry: Since you have kept your CPA/Auditor informed of your project there should be no surprises here. Your CPA/Auditor will help ensure that you accurately convert this data to journal entries on the balance sheet.
EverydayCPA is specializes in helping implement, manage and review your project to achieve compliance with ASC 842. We have developed a project plan that focuses on completeness, accuracy and low-cost. The average hourly rate of steps #1, #2, and #3 is less than $20/hour; and steps #4 and #5 is less than $75/hour, our weighted average hourly project rate is less than $35/hour.
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