At its July 17, 2019, meeting, FASB addressed the challenges that companies face to account for new, complex accounting standards, including the new lease standard. Many private companies face resource constraints and increased costs when preparing to adopt the new lease standard. FASB is addressing these challenges by proposing to push back the effective date of Accounting Standards Codification (ASC) 842, Leases, for private companies by one additional year. Under the proposed timeline, the new standard will be effective for annual periods beginning after December 15, 2020, and interim periods beginning after December 15, 2021, for private companies. There are no proposed changes to the current effective date for public entities. FASB will issue an exposure draft for public comment, and we expect final standards will be issued before year-end.
Here's the proposed timeline:
- Public Entity – Annual & interim periods beginning after December 15, 2018
- All Others – Annual periods beginning after December 15, 2020
- All Others – Interim periods beginning after December 15, 2021
The new lease accounting standard will have a significant effect on most companies in the hospitality industry. Restaurant and hospitality companies typically have large portfolios of operating leases. Under the old standards, these operating leases were treated as off-balance sheet leases. Under the new standard, substantially all leases will be reflected on the balance sheet as a right-of-use (ROU) asset and lease liability.
Companies are being challenged to develop a thorough understanding of the new standard, inventory all their leases and identify software or external solutions to account for the new standard. Due to constant pressures in the hospitality industry and focus on labor shortages and costs, technology and mergers and acquisitions, it is challenging for company leadership to allocate time to adopt this new standard.
The newly proposed effective date should give companies sufficient time to prepare for a successful adoption of the new lease standard. We recommend that leadership focus on the following key areas to prepare for the standard:
- Learn about the new standard and educate key stakeholders.
- Assess the company’s internal resources to determine if you will need outside resources to assist with the adoption.
- Make decisions early in areas that affect the implementation scope:
- Transition method
- Practical expedients and accounting policy elections
- Review debt agreements and have discussions with lenders to determine if the new standard will adversely affect the company’s covenants.
- Develop an inventory of all lease agreements, service contracts and other arrangements that might contain ROU assets. You will need to summarize lease and nonlease components and review other contracts to determine if there are embedded leases.
- Determine if the company’s current accounting system is capable of implementing the new standard.
- Start developing the processes and controls necessary for effective implementation of the new standard, as well as the ongoing accounting requirements.
If you would like assistance complying with the new lease standard, contact your BKD trusted advisor. BKD has a library of BKD Thoughtware®. Visit our website to learn more.