ILMA Compoundings - March 2020 - 32

BUSINESS HUB

Time Is on Your Side
Making the Most of the Delay in Lease-Accounting Changes
By Ralph Petta

C

ertain private companies,
nonprofits and tax-exempt organizations that lease equipment
have been given an important advantage
in implementing new accounting rules -
more time. The Financial Accounting
Standards Board (FASB) recently
announced that the effective date of the
new lease accounting standard, Accounting Standards Codification Topic 842
(ASC 842), for private companies and
nonprofits has been delayed by one year,
with implementation beginning after
Dec. 15, 2020.
The delay will allow smaller
organizations to get their accounting
processes in place while they continue
to enjoy the advantages of leasing
equipment. Since ASC 842 went into
effect in December 2018 for public
companies, FASB members have
expressed that companies with limited
resources can learn from the implementation performed by large public
companies that possess more staffing
and resources. Having additional time
to get through at least one annual
audit cycle and regulatory cycle should
help smaller reporting companies and
private companies increase the quality
of their implementation.
CHALLENGES TO
IMPLEMENTATION
For companies that are still working
to implement ASC 842, the year
extension is particularly welcome to
address the following areas that have
posed challenges:
*	 Review of lease contracts and
what constitutes a lease. These

32

MARCH 2020

| COMPOUNDINGS | ILMA.ORG

can include multiple-element
arrangement contracts that
combine services, software,
hardware, consumables and/or
financing, such as is often found
with air-separation units or blood
diagnostic analyzers, as well as
contracts for energy, such as
power purchase agreements and
supply contracts. Some lessees
are having difficulty bifurcating
the cost of the various elements,
such as consumables, from the
embedded lease of the asset.
*	 Software implementation.
Currently, most lessee-oriented
software products are largely enterprise-sized and focused on real
estate. Lease accounting software
for smaller and midsized companies is not as fully developed. The
software for larger installations
can be cost-prohibitive, and the
vendors may be overbooked with
ongoing installation projects. The
delay gives software solutions vendors time to review and improve
their customer solutions.
*	 Consulting with auditors on
more complex technical issues,
such as interpreting the sale
leaseback accounting rules or
selecting appropriate incremental borrowing rates. Limitations
surrounding sale leasebacks are
a little more complicated under
the new standard, and users who
accumulate assets over a time
period to aggregate into one
sale-leaseback transaction for

expediency purposes may want to
discuss the new rules with their
auditors. Selecting an appropriate incremental borrowing rate
(IBR) also seems to be generating
questions in implementation,
especially since smaller lenders do
not often have these rates handy.
Other issues pertain to conforming and converting existing
financial reporting approaches
to those found in a new system.
For instance, a lessee may have to
convert a full-month approach to
recognizing rent expense in the
first month of a lease to an actual
days expense approach with a
new system. This will result in an


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ILMA Compoundings - March 2020

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