Your organization’s last-minute guide to ASC 842 compliance
It’s official: nonpublic real estate organizations are expected to either comply with ASC 842 by the end of Q4 2021 or start the New Year off on a sour note. A recent ruling from the Financial Accounting Standards Board (FASB) has confirmed that despite delay requests from nonpublic companies, the official deadline for these entities to comply with new lease accounting standards remains December 15, 2021.
While the compliance deadline for public companies has long past, this new ruling means that private and nonprofit businesses who have been relying on a delay or otherwise putting off the steps necessary to comply will need to kick their efforts into high gear in order to meet the requirements by January. Let’s take a closer look at what this means for nonpublic real estate organizations and their leases.
Defining ASC 842 and why it matters for real estate
While all public and private companies were previously under the jurisdiction of ASC 840, the prevalence of off-balance-sheet leasing – such as capital leases that could be accounted for via expense reports – motivated the need for improved financial reporting and increased transparency. This led to the introduction of the new ASC 842 lease accounting standards, which require all public, private, and not-for-profit entities to include all of their leases on the balance sheets. This means that capital leases (now called finance leases), equipment leases, and operating leases need to be accounted for and tracked in order to ensure auditability and transparency.
This is a new requirement for many companies and considering what a dramatic shift it is from previous lease accounting practices, real estate organizations may still have questions. Businesses will have to move fast in assessing their documents and processes in order to comply with new standards by the end of the year.
Check out the whitepaper, “Roadmap to New Lease Accounting Standards,” to learn more.
What stands between you and compliance?
The ASC 842 compliance deadlines could be tricky for some real estate organizations to meet. Before businesses can take concrete steps towards compliance, there are a few key questions they’ll need to answer.
1) What will you need to include?
As mentioned earlier, ASC 842 requires private and not-for-profit organizations to include all leases on their balance sheet starting December 15, 2021. Real estate businesses will need to assess the full breadth of their portfolio and track down each document. The goal of these new lease accounting standards is to increase financial transparency and accountability, so not only will your leases need to be listed on your balance sheet, they’ll also need to exist in an auditable document.
2) Where is the lease data coming from?
Data quality is an important aspect of lease accounting, and meeting these new standards is going to be challenging if your lease information isn’t accurate. Private companies need to review their leases and find all the different sources of information in order to pull out the relevant pieces. Without a full, accurate picture of the data, the accounting team won’t be able to run the right calculations.
3) How will calculations work with the new standards?
The new lease accounting standards will also change the way that organizations deal with certain calculations, such as the borrowing rate. Capital leases in the past have usually stated or implied a borrowing rate, but now, businesses have to calculate a present value on all of their leases to arrive at the liability costs. The borrowing rates will need to be calculated for each lease, making it even more important have accurate data on which you can rely.
How you can prepare for ASC 842
With data that needs to be brought together into one place and with leases potentially spread out across your organization, how can you best prepare to comply with ASC 842 by the end of the year? First, we need to assess to what extent your organization has gone digital.
Having all of your lease data scanned into a digital database that provides easy access for key stakeholders will be crucial in meeting the ASC 842 deadline. If your contracts still exist solely in paper documents stored in a series of filing cabinets, your organization is going to struggle in pulling all the relevant information together. From there, however, there are a few critical guidelines that can help you on your way to compliance.
1) Make sure your data is correct and complete
As mentioned, you should be gathering all your leases from across the business and extracting the key terms of those leases. After that, you need to verify that everything can be audited and traced back to a legal source document. Getting your leases into a digital format can be done quickly and efficiently with a software solution that automates your lease abstraction process.
2) Ensure communication between lease administration and accounting departments
You’re never going to get complete and accurate data if you don’t have clear communication between these two teams. In the past, these teams could operate by themselves without much issue, but with the new lease accounting standards, that’s not the case anymore. The lease administration team needs to be pulling out the data points that are actually relevant and necessary to the accounting team so they can use those pieces for accurate calculations.
3) Invest in necessary technology to find and extract data for ASC 842 leases
While communication lays the foundation for pulling out all the right information, getting the right data into the system is critical. “Bad data in, bad data out,” as some say. By leveraging technology that lets you automate your lease abstraction process and bring efficiency back into lease administration, your organization can stay ahead of the curve and prepare to meet the ASC 842 compliance deadline.
Many private and not-for-profit entities have their work cut out for them if they’re looking to meet the lease accounting standards deadline at the end of 2021, but with the right digital solutions and processes that enable you to quickly and efficiently abstract lease data and coordinate between the administration and accounting teams, your business can set itself up for success.
Watch the on-demand webinar to learn how MRI’s Contract Intelligence can help you meet ASC 842 compliance with AI-powered lease abstraction capabilities.
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