After a failed attempt to secure another extension, 2022 is — for real — the year that, for the first time ever, private companies will be required to add up and report on their balance sheets all of the real estate, equipment and vehicles they rent.
By all accounts, figuring out how to comply with the Financial Accounting Standards Board’s new accounting standard for leases will be a major undertaking. Fortunately, private companies don’t have to comply once the calendar changes to January. Private companies have until their first annual report in 2022, which will be December 31, 2022 for most companies in the calendar year.
You’re going to need that time, said Jennifer Booth, vice president of accounting at LeaseQuery, a lease accounting software company.
“They have the year, but they shouldn’t waste it,” Booth said. “It’s a big project to go through and identify all the leases.”
The first hurdle: tracking down all leases to figure out how to value those liabilities. Sounds easy, but it is not.
According to the new ASC 842 standard, a lease is “a contract, or part of a contract, that provides the right to control the use of identified property, plant, or equipment” for a specified period of time in exchange for money. With this updated definition, leases could be lurking where companies don’t expect them – and they need to be reported.
Fast-food chain Chick-Fil-A Inc. learned this firsthand as it began preparing to comply with the new rules. The privately operated chain had to sift through supply chain agreements and service contracts to determine if they met the definition of a lease and therefore had to be accounted for on its balance sheet, said Douglas Uhl, principal team leader, corporate accounting policy, at the company.
“We have processes in place to capture leases that have ‘leasing’ at the top, but we have a very decentralized procurement function, as do many companies,” Uhl said at a December meeting with the FASB’s Private and Small Business Advisory Boards.
Most company finance teams can easily identify large real estate leases, but smaller equipment or vehicle leases may be more difficult to track down. The details of these agreements may be in the hands of other parts of the company, such as B. of the company. Then there is the challenge of identifying the leases’ internal service contracts, such as finding out whether a two-year contract to service a set of rented photocopiers qualifies as a lease.
“This new standard can be quite onerous from a data perspective,” said Matt Hurley, senior manager in Deloitte & Touche LLP’s risk and financial advisory practice.
The FASB released the Leases Standard in 2016 after years of debate about how best to shed light on the money tied up in contracts for everything from factories to forklifts. For decades, companies only included leasing obligations on their balance sheets when the leasing contracts were financing agreements.
Outgoing lease rules included so-called “light lines” that allowed companies to structure their contracts in a way that they rarely had to report them. A company that mortgaged office space factories or financed the purchase of airplanes looked more indebted than a company that had hefty rent payments every month, investors and analysts complained.
Listed companies had to follow new lease accounting rules in 2019. They added billions in new liabilities to their books. Private companies and nonprofits were due to comply in 2020, but the FASB extended the deadline by another year in late 2019.
When the coronavirus pandemic hit, the FASB offered a one-year extension in 2020, but the Accounting Committee gave a resounding “no” in November as private companies pleaded for a further delay.
While private companies can benefit from the lessons public companies have learned in adopting the rules, they will still face some challenges, most notably the ongoing fallout from the pandemic.
In addition to dealing with labor shortages and potentially burned-out employees, the pandemic has forced businesses to streamline their leases. Some companies are turning to remote work and downsizing their real estate presence, which could cause some lease accounting headaches as they figure out how to account for modified or canceled leases.
The pandemic has also changed the way some companies operate. For example, supermarket chains have adapted to home delivery and drive-up orders. Many supermarkets have had to rent large separate freezers and refrigerators to store these orders. The new equipment needs to be counted and accounted for if it’s significant to the bottom line, LeaseQuery’s Booth said.
“There’s been so many real estate changes, so many distribution changes — all of which have a pretty significant accounting impact,” she said.