Implementation of New Lease Accounting Standard (ASC 842) at a Financial Services Institution
Requirement: Interim Management Services
In the fall of 2018, the initial implementation date for the new lease accounting standard (ASC 842) was rapidly approaching (1/1/2019). A lot of small to mid-sized companies did not have the internal resources to spend on this endeavor and some were finding themselves under the gun as they prepared for the approaching deadline.
While the theory is straightforward in that all leases will now be capitalized to the balance sheet, several additional factors must be considered when planning and preparing for the upcoming implementation. For example, in addition to their assessment of known leases, companies must also consider whether any other contracts allow them to control the use of assets used to complete the contract. If such assets exist, this contract is considered to contain an “embedded lease.” (If you require your supplier, as part of a purchase contract, to acquire special tooling to produce your materials, that contract would contain an embedded lease and follow the guidance set forth in ASC 842.)
As part of the initial set up and compliance (Day 1), companies must review all leases and contracts to determine their new lease asset and liability amounts. These companies will then need to implement procedures that will allow for future compliance with: monitoring, accounting and financial reporting (Day 2). Post implementation success requires the development of a repeatable process to consistently maintain accurate and complete lease records. And every company will want to have systems, processes, and controls in place that will stand up to an audit.
For one financial services institution, they hadn’t begun their implementation project – even as October 2018 was drawing to a close. So, they engaged ProNexus to help review their leases, document their leasing activities and prepare for their implementation. Additionally, this Company didn’t have time to investigate software packages that could prepare the required calculations and disclosure information. ProNexus was also engaged to develop an Excel file that could calculate and provide the required information.
Initially, ProNexus was going to take a supporting role in the company’s ASC 842 implementation project, since the company had already identified an internal employee who would lead the project. But, shortly after the project began, that project manager left the company and ProNexus was asked to plan and perform the entire project.
Due to the client’s limited resources, ProNexus provided a comprehensive plan that would prepare the client for both the initial implementation (Day 1) and future compliance (Day 2). The ProNexus plan included a three-phase approach: Planning & Scoping; Assessment; and Execution.
Due to the compressed time-frame, ProNexus immediately and simultaneously began Phase 1 (Planning & Scoping) and Phase 2 (Assessment). During these first two weeks we: rapidly assessed the company’s leasing environment; set a compliance timeline; summarized their key contract/lease accounting policies and process flow; identified the population of existing contracts / leases; and evaluated the staffing requirements for the project.
We quickly identified the appropriate staff to handle the project and began our review of the company’s contracts. Over the next three weeks we: reviewed and summarized all applicable contracts and leases; defined future state policy elections (including the recommended practical expedients); created and tested an Excel-based template to provide the appropriate lease calculations and information for footnote disclosure; and populated the Excel template with the appropriate required lease data.
During the project, the ProNexus team held weekly conference calls with the Controller and Accounting Manager to ensure that the project was progressing smoothly and in line with the clients wishes. After the work was completed, ProNexus met with the company’s CFO/Controller to: review the agreed upon deliverables; recommend future state accounting procedures; and review/confirm our approach and results with the company’s external auditors.
The project was successfully completed in time for the company to implement in January 2019!