The Financial Accounting Standards Board’s new lease-accounting standard, ASC 842, went into effect for public transportation and logistics companies last year. FASB recently proposed extending the deadline for private companies for one year to annual periods beginning after December 15, 2020, which, as of August 2019, was still undecided. The new rules replace ASC 840, which has been used for more than 40 years, and changes the way businesses must account for finance (capital) and operating leases, moving almost all leases to the company balance sheet.
Previously, operating leases could be reported as a footnote in corporate financial statements, not affecting the balance sheet. These new reporting requirements are a fundamental change in the way businesses must now account for their lease obligations, and can have a significant impact on lease-versus-buy decisions as well as company financial statements. Even for public companies that made it through the first year of compliance, many are still struggling with developing repeatable processes to ensure continued compliance.
Transportation and logistics companies face significant challenges to ASC 842 adoption and compliance, due to the extensive and diverse types of lease assets that are central to the business. Everything from vehicle and equipment leases to leased storage units, airplanes, and ships will be affected by the change. According to the International Accounting Standards Board, companies are expected to bring upwards of $3 trillion in operating leases onto their financial statements due to the new accounting rules. Companies with large amounts of operating leases, such as logistic companies that lease airplanes, cars, and ships, will be especially impacted. Underscoring the enormity, four top publicly traded logistics companies alone moved nearly $5.2 billion in leases onto their balance sheets as a result of ASC 842.
Complicating matters even further is a slightly modified definition of a lease. Under ASC 842, “[a] contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” Compliance will require a change in mindset about what constitutes a lease.
Given these new requirements, transportation and logistics companies will experience the following:
Although private companies are not expected to have to comply with the new standards until annual periods beginning after December 15, 2020, public companies had to begin complying for annual periods beginning after December 15, 2018. Their experiences give private companies some insight into the challenges of compliance. Among the biggest lessons learned so far has been a tendency to underestimate the amount of time needed to successfully transition to the new standards. Transportation and logistics companies must give themselves enough time to develop new lease reporting methods, policies, and practices so as not to miss any leases. Collecting and organizing this data is time-consuming ,and accuracy is essential.
Based on the experiences of companies that have already transitioned to ASC 842, the transition can be eased by adopting some best practices:
One of the reasons these errors are being made is the absence of an “accounting-first” approach. Many of the existing leasing systems claiming to handle the new lease accounting standards are lease administration systems that quickly added on accounting capabilities to sell more software. Businesses are finding issues with the systems because they weren’t built as accounting-first systems. Look for lease accounting software solutions that are built by reputable accounting and tax software vendors who have the accounting and tax experts on staff.
ASC 842 is here to stay. Although the accounting changes are the most obvious impact to transportation and logistics companies, they aren't the only impact. The entire industry will need to learn a new way of doing business, as the changes will impact budgeting, contract negotiations, financial statements, internal processes and controls, systems, and data collection and reporting. This is an opportunity to reshape and improve the way transportation and logistics businesses function for more streamlined, accurate, and efficient lease management and continued success.
Adam Schrom is Senior Manager at Bloomberg Tax & Accounting.
Timely, incisive articles delivered directly to your inbox.