Challenges in keeping up with GAAP have never been greater, with pervasive changes in revenue recognition requirements set to hit most private companies this year, to be closely followed next year by getting most leases on the balance sheet for the first time. These confusing standards, along with the usual host of less widespread financial reporting changes, are daunting (to say the least).
We had intended to post a series of bite-size nuggets to start the education process for adopting the new leasing standard (see first post in the series, Patrick Ngai’s article from February 6, 2019: ASC 842 – Leases, the OTHER New ASC). For the best of reasons, we have delayed those plans. We believe the longstanding effective date for most private companies and not-for-profits, scheduled to begin with calendar-year 2020 reporting, will be deferred by one year.
Based on feedback from constituents, including surveys of private company readiness to adopt the new lease standard, in July 2019 the FASB unanimously voted that a draft Accounting Standards Update (ASU) be prepared and exposed for public comment for 30 days – a short window, owing to its expected popularity. The Exposure Draft was issued on August 15, 2019 with comments due by September 16, 2019. We are quite optimistic that before the end of 2019, the FASB will have formally deferred for one year the effective date for implementing the new lease standard to begin with private company calendar year 2021 financial statements.
Aside from following close on the heels of the massive revenue recognition re-write, data has emerged from the earlier public company adopters of the lease standard that indicates the adoption required more resources than originally expected. In many cases, especially when a company is “lease-intensive”, the state of a company’s existing lease documents and records was a complicating factor. Another factor is the expanded scope of what is considered a lease and the fact that leases can be imbedded in service contracts that don’t appear to be or contain lease arrangements (outsourced data management and warehousing are common examples). As they say, the devil is in the details.
Another factor to consider is the external users of private company financial statements, such as banks or non-management investors. Post-implementation financial statements of companies with material leases will look quite different, especially with respect to leverage ratios and EBITDA measures. Giving key users more time to adjust to the new metrics by referencing public company adopter results, will enable creditors and investors (and their legal teams) to make any necessary amendments to agreements dependent on certain financial results.
So, the key take-away now is…while it is not yet “official”, we do expect that the lease standard implementation date for most private companies will be deferred a year, to start with calendar year 2021. The challenge for all of us will be to use that extra time wisely.