At the start of 2019, the implementation deadline for the Financial Accounting Standards Board’s (FASB) new lease accounting standard passed for public companies. Now, the focus — and pressure — is on privately held organizations, which must adopt the requirement by 2020. And new research suggests that many of these firms may find themselves scrambling to meet the deadline for compliance.
A survey of chief financial officers (CFOs) by Robert Half and global consulting firm and Robert Half subsidiary Protiviti, found that 44% of private companies have not completed the transition to the new lease accounting standard. Eighteen percent report that they have yet to begin the process.
See the survey results by company size.
View the survey results by industry.
Given the complexity of the new lease accounting standard, procrastination is a risky approach because the work involved can be intense. “While private businesses have learned valuable strategies from public companies’ transition experience, many organizations still don’t realize the amount of work required to adopt the new lease accounting standard,” says Tim Hird, an executive vice president with Robert Half.
He adds, “Private companies with decentralized business units and high lease volumes will be most impacted, but any firm still in the early stages of the compliance process — or that hasn’t started at all — will soon find pressures mounting and options dwindling.”
Quick review: Changes to lease accounting
For companies still ramping up with the new standard, here’s a quick review of changes to lease accounting. The new lease accounting standard puts an end to off-balance sheet accounting in relation to leasing and redefines common metrics such as gearing ratios. Given the prevalence of leasing — including common office items like coffee machines — and renting, the new adjustments to the standard impacts almost every organization across industries.
From an operations point of view, the lease accounting standard has a significant impact on accounting and finance functions. It will require your department to:
- Update software or install new systems
- Write new accounting policies and procedures
- Train staff and offer support through the transition period
- Guide clients as they review their approach to leasing
- Take a proactive approach to change management
These and other steps take time. The earlier you start, the readier your department will be to comply with the changes to lease accounting.
Adopting the new standard: 8 steps for success
As was the case with FASB’s new revenue recognition standard, organizations will want to approach their transition to the new lease accounting standard as a change management project. That process should include the following steps:
1. Analyze the current state
Every company should have a dedicated steering committee to oversee each step of the transition. Begin with a full diagnostic and readiness assessment to determine the required steps. Map processes, chart capabilities and form a full picture of where you are so that you can identify the areas that will need to change.
2. Educate senior management
All decision makers in the organization need to be brought up to speed on the implications of the new standard. This group should include non-accounting staff, such as the chief information officer (CIO) or vice president of IT, who are likely the people overseeing software and system changes. The transition committee may want to bring together additional stakeholders to talk about what the changes to lease accounting mean at an executive level.
3. Identify staff who will be involved in the process
The next people to speak with are the employees who will implement the standard on a day-to-day basis. They will have plenty of questions about how this change affects their role, what additional duties they’ll have and how they’ll be trained. These workers will also have insights into the transition. So, make sure the steering committee has a mechanism in place to get their ideas and feedback.
4. Train your staff
Before implementing new processes, everyone on your team will need to know not only what additional duties they’ll have, but also how to carry them out. Remember, training shouldn’t stop until everyone is comfortable with the change. Hold periodic brush-up courses to ensure employees are following best practices and adapting effectively to the changes to lease accounting.
5. Identify internal skills gaps
Can your present team handle all the necessary tasks to meet the changes to lease accounting? The only way to know for sure is to make a current assessment of which elements of the process your employees can — or can’t — handle.
6. Determine whether more support is needed
If you find that your existing staff can’t manage all elements of the transition alone, you’ll need to tap outside resources to complete the project successfully. Resources could include a trainer to teach new skills or a project consultant who can help the entire department through the transition. You may even want to add a specialist, such as a property accountant or revenue accountant, to your team.
According to the Robert Half and Protiviti CFO survey, most companies that have started or completed the transition to the new lease accounting standard expect to seek additional help for upcoming needs. About six in 10 CFOs (61%) said they would use a combination of external and internal resources or external resources only to staff future lease accounting initiatives.
Hird says, “Private companies often lack the necessary staff and expertise to manage the change. Working with consultants and interim professionals can help firms access needed skills or relieve full-time employees of everyday duties so they can shift their focus to the transition.”
7. Turn to advanced technologies
Robert Half and Protiviti’s research also found that organizations that had successfully completed their transition to the new lease accounting standard frequently utilized new tools in the process. Four in 10 companies said they relied on leading-edge technologies like artificial intelligence and machine learning to comply with the standard. A similar percentage (41%) expect to lean more heavily on advanced technology in the coming years to help them stay in compliance with the standard’s requirements.
“The new lease accounting standard has proved challenging to organizations of all types and requires careful coordination of departments and resources,” explains Chris Wright, managing director of the financial reporting remediation and compliance practice for Protiviti.
“Advanced technologies can make compliance faster and more effective, while allowing staff to focus on more strategic aspects of the transition.”
Just be sure to manage digital change effectively, and help your team navigate any disruption it creates. A separate CFO survey by Robert Half Management Resources found that regulatory compliance challenges and keeping pace with technology are the greatest pressure points impacting today’s finance teams. If they’re not managed appropriately, they can disrupt operational functions and resources beyond the finance department, affecting an organization’s ability to adapt quickly to shifting business demands. Potentially, they could undermine your team’s efforts to meet the compliance deadline for the new lease accounting standard.
8. Communicate milestones and deadlines
As the transition to the new lease accounting standard draws closer, make sure everyone gets a regular heads-up on target dates that affect them. Clear communication from management is critical: Too often, projects fall behind because employees forget or aren’t sure when something is due. Don’t micromanage or pester your team members. However, do check on individuals’ progress and give reminders as warranted.
The new lease accounting standard is a major change, and it’s best to start the transition sooner rather than later. There’s still time to meet the deadline, but you’ll need to move fast. Assemble your team, train your staff, embrace the appropriate technologies, and consider bringing in specialized consultants and change management experts when the need arises.
You may also want to consider turning to a managed services provider for help, depending on the scope and complexity of the work your organization needs to complete to meet the 2020 compliance deadline. Robert Half and Protiviti’s Managed Solutions team as an example, recently assisted a manufacturing company with adopting the new standard, including by helping to conduct a scoping assessment of the company’s project and introducing machine learning techniques for a broader data-abstraction effort.