After FASB Delays Accounting Standards, Here’s What Private Companies Should Be Doing Now
The FASB may have delayed implementation of the Leases standard (Topic 842) for private companies, but here's what companies should be doing now to be prepared.
By Dave Loucks
The Financial Accounting Standards Board (FASB) on May 20, 2020 affirmed its decision to amend the effective date of Topic 842 Leases (Topic 842) for private companies. Topic 842 will now be effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early application will continue to be permitted. We anticipate that most private companies will be taking advantage of the extra year to assess their reporting requirements. Despite the delay, there are a number of points that companies should be considering.
Show Your Work
With the work-from-home situation, it’s always good to show production and movement forward as an accounting group. Developing the population of all your leases is an exercise that can be done now to see how difficult or feasible an implementation you’ll have. A good start is to look through the accounts payable ledger for recurring payments. Also, in this time in trying to find savings, you may want to identify payments on items that aren’t needed or underutilized.
Developing the population now will give you a baseline and this baseline can be used to identify movements in your population. We’ve seen a lot churn in our client’s vehicle populations with some company policies of not exceeding 100,000 miles. Having documentation that shows assets like compressors being moved between locations and that are periodically swapped out would support not recording a long-term lease. You may also want to identify leases that may end prior to Topic 842 adoption in 2022.
Education Is Key
Education of your non-accounting personnel on Topic 842 is key to helping you know what new arrangements are being made, especially when we aren’t in the office every day together. Schedule meetings with the operations group and sketch out your operations. Ask questions relevant to operations as to whether you own or you pay someone else for that tangible piece of equipment. If you pay someone else, it’s most likely a lease. Have the same conversation with your office manager and the head of IT to search for leases within the office environment. You should repeat these conversations quarterly to track changes within these groups.
"Identifying audit issues within your lease population now will also help you plan out your Topic 842 implementation."
Now is also a good time to see what data you can get from vendors to ease your data entry. In our experience, fleet managers have been good to work with on the vehicle side. They have a lot of data that they can send to you electronically. Knowing what you can get from vendors will help you in planning out your implementation timeline.
Identify Audit Issues
Identifying audit issues within your lease population now will also help you plan out your Topic 842 implementation. Look for payment terms that aren’t just monthly. Assets that have been built to your specifications will also need to be documented and run through a determination to see if it’s a lease or not. Having these issues identified now will allow time to network with your friends at public companies to see how they handled this and to do the accounting research necessary to document.
"Despite having the option to delay, adopting leases in 2021 can give your accounting group a sense of accomplishment."
Despite having the option to delay, adopting leases in 2021 can give your accounting group a sense of accomplishment. Early adoption shows that your accounting group is proactive and has things under control. The impact of Topic 842 adoption is probably not going to be material to your overall balance sheet. But, having something done before you have to always feels good.
As a group with a proven software application that handles the math under Topic 842, another year wasn’t at the top of our wish list. We’re now anticipating most private companies to remove Topic 842 from their to-do list until 2022, and we know we’ll still be assisting clients all the way through the first quarter of 2023. In the meantime, if you have any questions, know that we're here to assist you every step of the way toward Topic 842 implementation.
About the Author:
Dave Loucks is a Director in the Complex Financial Reporting group at Opportune LLP where he’s primarily responsible for assisting clients with financial reporting for oil and gas operations. Dave is one of the country’s foremost experts regarding the reporting for asset retirement obligations (ARO) and the standardized measure of oil and gas (SMOG). Dave and his team developed and now implement our proprietary Assent 143 (ARO), Assent Leases, and Assent SMOG (oil and gas disclosures) software applications for Opportune clients. Additionally, Dave works with the Petroleum Development Institute (PDI) at the University of North Texas to instruct classes on the determination and presentation of hydrocarbon reserves for financial reporting purposes. Prior to joining Opportune in 2009, Dave spent 14 years in public accounting where he managed the audit engagements of clients in the energy and software industries. He also was the CFO of an INC 500 software company from 1998 to 2000.