At a Glance
A 2022 report from the Visual Lease Data Institute revealed a shocking truth about private company leases. The report found that nearly three-quarters (71%) of private companies do not feel confident about how much their leases cost their business.
This high level of uncertainty may have repercussions for private companies unable to correctly record their leases per the ASC 842 standard, which is currently in effect for 2022 financial statements. A delay in transitioning to these new lease accounting standards can have numerous negative consequences for a business.
Learn why some businesses struggle to transition to ASC 842 lease compliance and the risks of delaying the transition.
Roadblocks to Proper Lease Management
Leases, including real estate, equipment, vehicles, and land, often account for a large percentage of business operating expenses. However, many private companies have not invested in sound lease management and accounting processes, which explains why 33% of private companies are unprepared to transition to ASC 842.
Many private companies are experiencing workplace shortages and employee retention issues, which may delay the transition. With 93% of private companies reporting that their teams are stretched to the limit, many businesses have focused more on retaining employees and avoiding burnout than on lease compliance.
Some companies find that the lease accounting process has increased the demand for ongoing education, with 33% of private companies naming knowledge maintenance as a top obstacle in lease accounting. Other companies report that the challenges associated with adopting new technologies into the lease accounting process have required their workplace to undergo a complete digital transformation.
However, since the ASC 842 ruling requires companies to distinguish between financing and operating capital leases when they create their balance sheet, companies must perform an in-depth analysis of their lease contracts to determine the proper classification. As a company transitions to comply with ASC 842 lease accounting rules, they are compelled to prioritize lease management.
Prioritizing lease management can yield benefits beyond achieving compliance, including improved automation, reduced risk, better customer service, and more cost-saving opportunities.
Risks of Not Implementing a Proper Lease Management Strategy
As of 2022, 98% of private companies have begun to transition to ASC 842 accounting standards for lease management, though a third of those companies are still unprepared to transition fully.
The downsides of not transitioning to a proper lease management strategy go beyond repercussions for ASC 842 non-compliance. These may include:
- Unnecessarily complex manual process for lease accounting with an increased risk of human error
- Failed annual audits because of incomplete or inaccurate lease data can damage company credibility and result in higher fees
- Challenges addressing new business needs because of lack of understanding or familiarity with lease details
Windes Can Help Your Business Achieve Compliance
Windes’ team of accounting experts can address any disparities that may prevent your company from achieving compliance with the new lease accounting standard. Windes offers ASC 842 Lease Accounting Services, including lease classification, accounting transition, and disclosure requirements that help businesses transition to compliance.
With expertise in finance and operating lease analysis, our experienced team is ideally equipped to help private companies achieve compliance and avoid risk. We serve companies in Long Beach, Los Angeles, Orange County, and throughout Southern California.
Connect with us today to learn more about how we can help your business with ASC 842 compliance and other financial, accounting, and real estate tax matters.