Are you ready for ASC 842?
If you’re unfamiliar with the new lease accounting standard, then we want to help you gain a working knowledge of the topic and help make the accounting easier. Because as a commercial real estate lessee with multiple locations, your operating real estate leases are likely both a liability and an asset. And very soon, you’ll need to start reporting them on your balance sheet.
We sat down recently with Mike Jerman, Managing Partner of Hollywell Partners, a rapid response accounting and finance consulting firm, to discuss how Leasecake provides a critical role for CPA firms like his in helping private companies meet the ASC 842 implementations. As an experienced technical accounting professional and leader focused on client service for large, listed, and private equity companies working with the SEC and IFRS, Mike’s been around the block, and always looks for efficiency. For his team – and his clients.
With help from Hollywell, we’ve assembled the following 2020 compliance timeline to ensure companies aren’t scrambling prior to the private company effective date (For interim and annual periods after December 15, 2019), a one-year deferral by the FASB of the effective date of interim and annual periods after December 15, 2018.
FASB pushed it back a year, but don’t let that be a reason to delay the prior work plan. There are some potential gotchas along the way, which is why Mike offered his insight on the common pitfalls experienced by public and private companies. He sees how Leasecake can alleviate the pain in conjunction with Hollywell’s team of big four CPA talent. It all comes down to how your lease obligations may be both an asset and a liability on your books – at the same time…!
How can this be? (Continue reading at your own risk …)
The new standard says a lessee’s obligation to make lease payments meets the definition of a liability, because it involves a present obligation that arises from a past event and the obligation is expected to result in an outflow of economic benefits. The “past event” arises when the lessee signs the lease and the lessor makes the underlying leased asset available to the lessee.
The “present obligation” arises because the lessee cannot typically avoid making the contractual payments.
Furthermore, the lessee’s right to use the underlying asset during the lease term meets the definition of an asset. Despite legally owning the asset, the lessor typically can’t use or even access the underlying asset without the lessee’s consent.
(There, you can open your eyes again.)
The Road to ASC 842
One of the most significant challenges is creating a complete lease inventory. And it’s best to get ready now. Leasecake clients who seek an ASC842 solution avoid this pitfall by taking advantage of our streamlined lease onboarding wizard. With the easy-to-use interface, they quickly create a complete financial picture for their portfolio, including reporting and collaboration with outside CPA firms or an experienced internal accounting team.
“Leasecake has every bit of information we need for our accounting team, from all the key dates, rent amounts, and commencements to increases, renewal options, and expirations,” said Brian Dixon, Real Estate Director of Team Oney Brands, which operates 100+ Papa Johns, and QDOBA restaurants. “It’s remarkably efficient for our team — and it’s easy.”
An incomplete lease inventory leads to omission of leases from computations and disclosures. It’s particularly important when there are variable lease terms and changes in future lease payments.
The initial measurement of lease-related assets and liabilities requires straightforward calculations. However, subsequent changes in lease payments that vary with a rate or index (e.g., rents that increase for changes in an inflation index) are accounted for differently.
Bottom line: Make sure you conduct a thorough investigation of all your leases, requisite rent increases, and renewal options, while partnering with appropriate operations personnel to facilitate complete lease populations and sustainable lease accounting processes.
Create a vision for what future lease processes will look like, and look through that lens to ensure you select a scalable software solution that takes into account company-specific requirements. Then engage a strong project lead who will facilitate effective and timely communication across all stakeholders.
Ensure strong communication between company personnel and implementation consultants to help avoid delays, cost overages, and inefficient data conversion.
“I know without a doubt that I’m not missing anything in my role as a multi-unit operator,” said Tim Doktorski, the controller for 70+ Domino’s locations. “When I found Leasecake and discovered the software was designed specifically for the tenant side, I was absolutely elated that there was a solution designed for the tenant side.”
Step 3: Get started now!
- Review software platforms and make a selection by the middle of Q1.
- Begin lease onboarding immediately upon selecting a platform.
- Sample agreement review and embedded lease search completed by the end of Q1.
- Data conversion and implementation preparation activities to continue throughout Q1.
Q2 & Q3 2020:
- Data conversion and cutover completed by August 2020.
- Sample testing validation completed by end of Q3.
- Training of operations, accounting, and finance personnel throughout.
- Communicate closely with your accounting team and outside CPA firm to review the disclosure tables and footnote preparation started in Q3 with plans to finalize in Q4.
- Review by management no later than November 2020.
So let’s get started! With Leasecake, it’s easy.
For more information, contact Max Porter: Max@leasecake.com or 310-430-1375
Hollywell is an accounting and finance consulting firm founded to provide big firm resources for a much greater value. Getting to the issue, Hollywell is well versed in lease accounting software review to detailed calculation and lease classification assessment through to training and the drafting of required disclosures. www.hollywellpartners.com