Many private companies are breathing a collective sigh of relief since the FASB postponed the effective date for the new lease accounting standard (ASC 842)—now Q1 2021 for calendar year-end private companies. The one-year deferral has some moving implementation plans to the back burner. But ask the public companies that have already implemented ASC 842 and they’ll tell you—waiting to start could be a big mistake.
PwC’s 2019 lease accounting survey asked public companies to consider, in hindsight, what they would do differently during their transition to the new leasing standard, if they had the chance to do it over. These “lessons learned” emerged from more than 200 finance executives who offered words of wisdom: start early, focus heavily on selecting your lease accounting system, and ensure you have the right expertise (in-house or outside).
Here’s a closer look at the major themes that emerged:
Time is of the Essence
The finance executives we surveyed gave compelling reasons for starting implementation early, including reducing time pressure and the need for band-aid solutions down the line, lowering costs, and allowing more time for testing and fixes.
- It’s going to take a while: Dozens of survey respondents emphasized that various aspects of implementation took longer than anticipated. Initial steps, such as engaging a consultant, selecting lease accounting software, and getting contracts signed exceeded timing expectations and created a crunch down the road. Obtaining buy-in and input from internal stakeholders also takes time. Engaging them early and often would have given executives and their teams a better initial understanding of requirements and data inputs. Continued outreach to these groups would have identified pain points as soon as possible.
- Time is money: Less time meant higher costs for many. The fast approaching deadline drove companies to outsource areas like documentation and data abstraction when they might have considered different solutions had time permitted.
- Taking time upfront to research and test: One of the most widely expressed regrets was not implementing new lease accounting software with enough time to test. An earlier start would have allowed companies to test different scenarios, run shadow processing for a quarter or more before the deadline, and sort out software bugs and design flaws. A later start also translated into short-term fixes in many cases; many executives that reported deploying band-aid solutions to ensure compliance said they are now expending more resources to improve their processes. For example, one executive lamented using one system to reach compliance, only to retrain staff on a better system just as people acclimated to the first one. There is great value in taking the time upfront to get things right on the first try rather than costing your company and your staff time and money to do it all over again when a better solution or process is discovered.
Choosing a Software Vendor
Disappointment around initial lease accounting software solution selections was widespread. Executives noted that starting the vendor selection process earlier would have afforded them the opportunity to better tailor the lease accounting systems to their business needs and budget.
“Start earlier and test more scenarios.”
- The quest for quality: The importance of carefully vetting software choices was a common theme. In several instances, system solutions were not ready, required frequent updates and manual work-arounds, and had limited functionality. One executive suggested testing multiple systems to verify performance as promised. Another recommended preparing targeted examples to run during lease administration software demos to get a more granular look at how certain functionalities would operate post-implementation.
- One size does not fit all: Our survey respondents made clear that the right solution depends on the specifics of the lease agreements at a given company. Lessons learned on this front included establishing a materiality threshold and assessing the number of leases to see whether a simplified system or spreadsheets would suffice. The consequences of that assessment cuts both ways: we heard from executives who regretted trying to get by with spreadsheets instead of a more sophisticated solution, as well as those who wished they had chosen a simpler system because they had relatively few leases. As one executive lamented, “We looked for a system to account for lessee and lessor agreements, even though we only have a few lessor agreements.” Taking the time up front to assess company needs and software options can lead to significant savings down the road.
Building the Right Team
Project staffing also proved challenging. Many executives regretted not having dedicated resources — internal or external — focused on lease accounting implementation. Lean staffing, competing priorities (like revenue recognition), and underestimating project needs slowed progress and led to long hours to reach compliance. Leveraging internal project management expertise, making a strong business case for implementation and post-implementation support, and “identifying the right people with the appropriate skillset/mindset” early on would have facilitated the effort, according to survey respondents.
Technical expertise was another recurring theme. Executives emphasized the importance of strong technical support to implement lease accounting software, including close coordination between internal IT resources and the lease system provider. Early and close coordination between the tech and accounting teams would also have provided a fuller picture of the accounting system’s functionality.
Parting Words for Private Companies
Lease accounting implementation isn’t going to happen overnight, but fortunately for private companies, there are many valuable lessons to be learned from public companies that navigated the new standard. Starting early, choosing the right vendor, and making sure you have the right team with the appropriate expertise can help you save time and money in the long run.
For more insights from PwC’s 2019 lease accounting survey, visit: pwc.com/us/accountingsurvey.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
C.J. Finn is a partner in PwC’s Private Company Services group. He has over 16 years of experience in public and private accounting, including advising large multinational clients on technical complex accounting areas and financial reporting. He advises PwC’s audit and non-audit clients.