Companies are notoriously lax in preparing for new accounting standards, such as the forthcoming lease accounting standard for private companies.
However, as Deloitte notes in a new poll, some businesses may be even further behind than usual given changes from the pandemic. For instance, real estate needs are changing for companies with employees working remotely. With that adoption of remote work, they may need to exit their lease, modify their lease or execute a sale-and-leaseback transaction. As those scenarios play out, different accounting treatments are needed, according to Deloitte.
Deloitte also notes that recent migrations to the cloud could also have an impact as companies adopt the Financial Accounting Standards Board’s cloud computing accounting guidance. Under the lease accounting standard, Deloitte says companies could configure cloud agreements for specific accounting treatment.
“Some shifts organizations made during pandemic-driven disruption have implications for lease accounting, not the least of which are cloud migration and real estate footprint changes,” says Sean Torr, Deloitte Risk & Financial Advisory managing director and controllership – accounting and reporting leader, Deloitte & Touche LLP in prepared remarks. “Whether private entity leaders are among the concerningly high rate of those feeling unprepared to comply with the lease accounting standard or not, now is the time for those leaders to start asking questions around the status of implementation efforts.”
Under the accounting changes, companies must include most leases on their balance sheets for fiscal years starting after Dec. 15, 2021. Despite the changes brought about by the pandemic, Deloitte found that many companies feel confident they will be able to tackle the new standard. In the survey, one-fifth (19.8%) of privately held organization executives feel unprepared to comply with the FASB’s lease accounting standard, while 27.7% say they are prepared to comply. Deloitte says this is the highest private entity executive confidence rate in six years.
Of course, many of these companies took advantage of the additional year FASB offered to adopt the standard. At the time, 63.8% of private company executives indicated they would take advantage of the extension, according to Tim Kolber, a managing director and co-lead of accounting standard implementation services in the Audit & Assurance practice of Deloitte & Touche LLP
Torr says that getting lease accounting right should be a top priority for privately held organizations in the months ahead. Deloitte says that they should ensure all appropriate lease data is fully centralized, captured and checked for accuracy. Then it must be checked to see if it’s aligned with their organization’s accounting policies. Finally, companies must develop a process to maintain lease data in the future.