Companies struggled in first audits under new accounting standard on leases and coronavirus

More than half of companies that completed their first audits under the new rental accounting standard needed to go the extra mile, a new survey found, but the extra work provided more transparency and helped businesses cope. to the unexpected crisis of the new coronavirus, which resulted in numerous lease modifications and rent concessions.

The investigation, by lease accounting software developer LeaseQuery and CPE provider Encoursa, found the Financial Accounting Standards Board’s new lease standard, also known as ASC 842, to be a challenge during the process of leasing. post-transition audit. All 240 accountants surveyed said they identified more cash flow opportunities and improved data transparency with the new standard. More than half of the SOEs surveyed (58%) discovered integrated leases when preparing for their post-transition audit, and 26% updated their internal controls for terminations and lease changes.

The new leasing standard puts operating leases on the balance sheet for the first time for many companies. It entered into force for state-owned enterprises at the beginning of last year. It was supposed to go into effect this year for private businesses and nonprofits, but in response to the COVID-19 pandemic, the FASB has postponed the effective date for another year (see the story). For them, the new standard applies to fiscal years beginning after December 15, 2021 and to interim periods in fiscal years beginning after December 15, 2022. The FASB’s sister organization, the Governmental Accounting Standards Board, has also delayed the date. ” entry into force of its standard of leases for state and local governments (see the story).

The delay will give businesses and nonprofits, and their auditors, more time to implement the new standards and ensure they are being applied correctly.

“The study shows that after the transition there is still a lot of work to do,” said Jennifer Booth, vice president of accounting at LeaseQuery. “This shows that the first year audit requires a considerable effort. Then, the ongoing process of Day 2 also catches many businesses off guard. “

The COVID-19 pandemic has cost many companies time and made it more difficult for the new standard to be implemented and their financial statements to be audited by an auditor. “This study shows that there is a lot of work on day 2,” said Booth. “This has been further exacerbated by the pandemic this year. Our study shows that a number of companies used Excel rather than a rental software tool.

The survey found that 50% of those surveyed used rental software to prepare and complete the audit, while 38% used Excel or another spreadsheet. Those who originally thought Excel would do the trick for minimal lease changes now face difficulties in accurately accounting for all the leases that have had to be renegotiated due to COVID-19.

“The situation this year has shown that if you have all of your leases in Excel it can be very difficult to keep up with the changes,” said Booth. “A business would typically only have had one or two changes per year each time new leases were made. Then if they renegotiate a number of leases because those assets are not being used – as we know from many companies – all of a sudden you have to factor all of those changes into your balance sheet. A good rental software solution can either help you account for them as a change or take the relief from the FASB and account for them as a rental grant for the current period. But it’s very difficult if you try to keep track of it all through Excel.

In addition to extending the effective date of the new standard, the FASB has also responded to the COVID-19 crisis by providing advice on how to account for concessions and lease modifications.

“In April, they released a Q&A that allows companies to report on these negotiations, these rent concessions, with a lessor in the current period,” Booth said. “This year’s pandemic just highlighted what this survey was already showing, which is that this day 2 job is a huge effort, but it just gets magnified to have all of these changes. ”

While two-thirds of those polled said their auditors had full access to the organization’s lease accounting solution, 44% said their auditor was not involved in the transition process. Only 20% of organizations surveyed had auditors who held planning meetings before the first audit, and only 18% of companies surveyed said they had auditors guiding them through the transition to lease accounting. Fifty-three percent of private companies and nonprofits surveyed chose software backed by a SOC (Service Organization Control) report, which may reduce the testing that the company and its auditors need to perform to perform. an audit.

The postponement of the effective date of the standard for private companies and not-for-profit organizations has been helpful in preparing for the implementation of the new financial reporting requirements. “The relief was helpful,” Booth said. “I think it allows companies to focus on the business during this time, but also to ensure that when the time is right in their business, they can start to go back to that transition. The data shows that there is a lot of work to prepare for compliance. It can really be a burden on the business if you are not prepared for it. If you prepare for it and talk to your listener early on, make sure the listener is in agreement with any procedures you follow. Otherwise it can be a bumpy road for both parties. ”

So far, with the first batch of financial data coming from state-owned companies, there have been a few surprises, but most companies appear to be in compliance with the new standard, according to Booth. “I haven’t seen widespread problems,” she said. “I think companies were able to do it for day one. But as the study shows, there was a lot of extra work to overcome that.”

The main surprise was the difference between the amounts that financial analysts had estimated that would be added to the balance sheet versus the leases that must now be declared.

“There have been mixed results this year,” Booth said. “Earlier this year, when the first SOEs released their 10-Ks, the presumption had been that investors had already factored in the changes in the balance sheet with what they were doing with their own analysis in terms of what commitment. ‘they took. included in their projections. I think a lot of investors discovered that there were differences between their modeling and what companies put on the balance sheet. I think this demonstrated exactly what the purpose of the FASB was for this effort in trying to make information transparent to everyone. Instead of investors having to guess and model what a company’s obligations are, these guidelines now lay it all out in financial statements. Hope it’s a lot more transparent when you compare companies.

The lease transition does not end with the adoption of the new standard. “It’s a lot of extra work for a company to make sure they have the controls and processes in place to meet their internal control requirements, especially in a situation like this year,” Booth said. .

Previous The 6 Best Accounting Software for Nonprofits of 2022
Next Citi expands fund accounting services to UK investment funds