Why Clients Shouldn’t Ignore FASB Lease Standardsby
While the deadline for FASB lease accounting standard compliance will likely be pushed back, now is certainly not the time for your clients to press pause on getting a handle on their lease information.
In an act of relief for companies during the coronavirus pandemic, the Financial Accounting Standards Board (FASB) recently voted to propose a one-year deferral of major lease accounting standards.
This proposal would allow private companies an additional year, on top of the initial delay that went into effect October 2019, to adopt the lease accounting standard in their financial statements. Public not-for-profit companies that have not yet issued financial statements would also be granted an extension.
Many businesses were already facing challenges in implementing the new standard, and with the effective date imminent for non-public business entities, FASB is taking steps to give private companies more breathing room. The proposed accounting standards update was open for public comment until May 6, 2020; the expected amendments are expected to be issued shortly. Should the effective date be delayed as proposed, companies will be given some additional time to focus on their immediate operational concerns and they will have more time to prepare for ASC 842 compliance.
For many, this delay may be seen as a welcome reprieve from managing the complex and time-consuming lease accounting process. However, it has become abundantly clear that accurate lease data will play a vital role in helping these companies navigate the multitude of new business decisions and accounting challenges related to the coronavirus pandemic.
With the right solution in place to manage and organize complex lease portfolio data, private companies and government entities can improve their current business operations, and gain access to cash while simultaneously laying the groundwork necessary to meet future compliance requirements.
The Importance of Lease Data Amidst COVID-19
COVID-19 has brought to light the importance of having timely access to critical lease data, such as termination clauses, rent abatements and co-tenancy clauses. In volatile times like these, companies need to quickly identify their rights and obligations buried in their real estate and equipment lease agreements. Prompt access to this information could unlock hundreds of thousands of dollars in savings.
There are also a variety of accounting challenges that companies are encountering as a result of COVID-19, and access to lease data will be critical to easily and accurately capturing this information. For example, private companies that apply for and receive funds from the Paycheck Protection Program (PPP) under the CARES Act will need a way to report on the percentage of the loan that is applied to rent. Additional areas that companies will need to monitor and account for in the new post-COVID reality include:
- Lease Modifications
- Variable Payments
- Operating Expense Pass-Throughs
- Lease Terminations
- Lease Impairments
- Lease Accounting Reporting
Manually wading through the morass of lease language is very slow and time-consuming. Resource-strapped companies were already struggling to manage this process before the pandemic. Now, more than ever, these companies need to bring a clear summary of their portfolio to their fingertips so they can pivot quickly. Businesses that use a lease management solution to house this information are better prepared to access pertinent clauses and therefore able to make informed decisions related to COVID-19 impacts.
Why it’s Still Critical to Prioritize ASC 842
Companies currently have a unique opportunity to reap dual benefits by gathering important data to save money during this time of economic transformation while preparing to meet the upcoming ASC 842 requirements. By properly managing lease data and financials, companies can avoid costly penalties, prevent rent overpayments and refinance leases – resulting in hefty cost savings given the expensive nature of common real estate and equipment leases.
But compliance with ASC 842 is no small undertaking and continued action and momentum towards compliance is best practice. In short, your clients should not look at this as another reprieve offered by the FASB and push the work further down the road. Instead, you should advise your private business clients to use this window to get their lease portfolio under management to improve their visibility, unlock cost-saving opportunities, and be well-positioned to meet pending compliance requirements.
Marc Betesh is the founder, chairman and CEO of Visual Lease. Prior to Visual Lease, Marc practiced law in New York City where he negotiated commercial leases. As an attorney and leading expert on commercial lease negotiation, lease interpretation and expense reimbursement clauses, Marc founded KBA Lease Services (1985) and Visual Lease (1996)...