After an unsuccessful attempt to get another extension of time, 2022 is, for real, the year in which private companies must account for all the real estate, equipment and vehicles they rent and report them on their balance sheets for the first time. time.
By all accounts, figuring out how to comply with the Financial Accounting Standards Board’s new lease accounting standard will be a major undertaking. Fortunately, private companies don’t have to comply as soon as the schedule moves to January. Private companies have until their first annual report for 2022, which for most companies in the calendar year will be December 31, 2022.
They’re going to need that time, said Jennifer Booth, vice president of accounting at LeaseQuery, a rental accounting software company.
“They have the year, but they shouldn’t be wasting that,” Booth said. “It’s a big job to go through and identify all the leases. “
The first obstacle: tracking down all the leases to understand how to measure these liabilities. It sounds simple, but it’s not.
According to the new ASC 842 standard, a rental agreement is “a contract, or part of a contract, which confers the right to control the use of an identified tangible capital asset” for a period of time in exchange for money. . With this updated definition, there could be hidden leases where companies do not expect them and they should be reported.
Fast food chain Chick-Fil-A Inc. found this out with its own eyes when it began to prepare to follow the new rules. The private chain had to go through supply chain agreements and service contracts to see if any of them met the definition of a lease and therefore needed to be reported on their balance sheet, said Douglas Uhl, senior team leader, corporate accounting policy, of the company.
“We have processes in place to capture leases that say ‘leases’ at the top, but we have a very decentralized procurement function, just like many companies do,” Uhl said at a meeting in December. with the FASB Private Company and Small Business Advisory Groups.
Most business finance teams can easily identify expensive real estate leases, but smaller contracts for equipment or vehicles can be more difficult to find. The details of these agreements may be in the hands of other parts of the business, such as operations. Then there’s the challenge of identifying internal service contracts from leases, such as determining whether a two-year agreement to maintain a line of rented photocopiers counts as a lease.
“This new standard, from a data perspective, can be quite onerous,” said Matt Hurley, senior manager of the risk and financial consulting practice at Deloitte & Touche LLP.
The FASB released the lease standard in 2016 after years of debate over how best to shed light on the money tied up in leases of everything from factories to forklifts. For decades, companies only reported lease obligations on their balance sheets if the leases were akin to finance agreements.
The rules on outgoing leases contained “clear lines” that allowed companies to structure their contracts so that they rarely had to declare them. A company that took out mortgages for office factories or financed the purchase of planes seemed more in debt than a company that had large payments owed each month for leases, investors and analysts complained.
SOEs had to follow the new lease accounting rules in 2019. They added billions of new liabilities to their books. Private companies and nonprofits were expected to comply by 2020, but the FASB extended the deadline for another year at the end of 2019.
When the coronavirus pandemic struck, the FASB in 2020 proposed a one-year extension, but the accounting board gave a firm ‘no’ in November when private companies argued for a further delay.
While private companies can benefit from the lessons that public companies have learned by adopting the rules, they will still face some challenges, especially the continued fallout from the pandemic.
In addition to dealing with labor shortages and potentially exhausted employees, the pandemic has forced companies to change their leases. Some companies have embraced remote working and reduced their real estate footprint, which could add headaches to lease accounting when figuring out how to account for amended or canceled leases.
The pandemic has also changed the way some businesses operate. For example, supermarket chains suitable for home delivery and take out orders. Many supermarkets have had to rent large separate freezers and refrigerators to store these orders. New equipment will need to be accounted for and accounted for if it is material to the bottom line, said Booth, of LeaseQuery.
“There have been so many real estate changes, so many distribution changes, all of these changes have quite significant accounting impacts,” she said.