august2021 - 32

FEATURE
LEASE CHANGES ADD COMPLEXITY TO
ACCOUNTING & 2021 AUDIT SEASON By Sarah O'Sullivan
ALTHOUGH THE COVID-19 pandemic has already introduced
several challenges for accountants, the 2021 audit
season is bringing new ones to the forefront.
Economic and consumer changes
disrupted financials and altered
business strategy, in many cases,
permanently. In fact, 31% of companies
reported they were reducing
their overall real estate footprint as a
result of the pandemic, according to
our COVID-19 Lease Impact Report.
Now accounting professionals are
reckoning with the impacts of these
changes during the 2021 audit and
financial reporting season. While
accounting for government relief
programs like the PPP and discussing
material impact of the pandemic
on financials and operations will be
critical this year, companies should
not overlook the significance of major
modifications to their lease portfolio,
new lease accounting standard
compliance, and the need to optimize
collaboration and communication in
a remote audit environment.
CLARIFYING
CONCESSIONS
Office space, storefronts and restaurants
spent much of 2020 closed or
with lower traffic. In the fall, 31%
of companies said they were renegotiating
leases for more favorable
terms. Another 29% asked for rent
concessions. Now that flurry of lease
concessions and contract changes due
to the pandemic need to be accurately
reflected on the balance sheet. While
concessions were a short-term solution,
finance personnel should be
reevaluating their long-term real
estate and equipment leasing needs
given the market change. Many
companies may look to build in more
flexibility to their lease arrangements
or reduce their overall footprint or
exposure. Others see prime opportunity
to expand and take advantage of
reduced rates or incentives.
No matter the path selected,
accountants will need to perform
a thorough review and take inventory
of all leases, making sure to
document and account for changes
in terms and concessions. While
the Financial Accounting Standards
Board (FASB) issued a question-andanswer
document in April 2020
aimed at reducing the burden on
accounting for rent concessions,
clear documentation and compliant
reporting will still be essential.
CONTINUING FOCUS ON
LEASE COMPLIANCE
The FASB's new lease accounting
guidance (Accounting Standards
Codification Topic 842 Leases) has
been in effect for public companies
since 2019, but the impacts on both
the balance sheet and audit process
remain. The new standard tracks
operating leases as liabilities for the
first time, skyrocketing average lease
liabilities on the balance sheet nearly
15x in the first year.
Auditors will feel this significant
impact as well. In fact, last year, half
of public companies reported that
additional effort was devoted to
their audit due to the lease accounting
transition. It will be necessary
to design new testing procedures to
address risks, ensure proper adoption
of the new standard as well as
continued correct application and
accounting in subsequent periods.
Last year, the FASB extended
private companies' compliance to
January 2022, allowing them more
time to prepare for the remote auditing
process which requires time,
32 AUGUST 2021 ■ www.CPAPracticeAdvisor.com
resources, staffing and technology.
After a reprieve in the deadline, private
companies should now be full throttle
ahead in planning for implementation.
Accounting professionals should work
closely with internal teams and auditors
to begin the process now in order
to ensure on-time compliance and also
reduce burdens and issues during the
next audit.
Working with auditors to better
understand the organization's current
lease accounting processes and
ASC 842 implementation plans is
more critical now than in the past. In
addition to the resources, tools and
technology companies need to comply
with the new standard, companies will
also benefit from additional time to
be trained and educated. Issues such
as how to identify embedded leases,
which can hide in contracts and cause
significant issues if missed, present
a crucial opportunity for coaching.
Private companies can learn from the
mistakes of public companies-44%
said their auditor had no involvement
in the transition process, which is a
missed opportunity for optimization
and a more streamlined audit on the
other side.
COLLABORATING IN A
REMOTE SETTING THAT'S
HERE TO STAY
Many companies have been working
in a remote environment for most
of the past year, but that does not
mean their processes have caught up.
Some auditors may find paper lease
agreements that aren't accessible
via a cloud system or breakdowns
in communication that could cause
additional challenges.
While vaccine distribution offers
more of a return to normalcy in the
near-term, the old ways of working
will not revert back. Accountants
should focus on building new best
practices and enhancing communication
and collaboration across
teams and with auditors with the
assumption that remote work and
remote audits are here to stay.
When it comes to proper lease
management, organizations should
be proactive in starting crossdepartmental
collaboration with
accounting and finance teams on
lease agreements in order to mitigate
risk. For example, some departments
like procurement and IT may directly
manage contracts, creating the risk
for overlooked changes or missed
embedded leases if not properly communicated
to the accounting team.
Accountants should create
internal controls and establish a
central, cloud-based location to
store all leases to remain organized
and transparent for compliance and
auditing.
CONSIDERING WHAT'S
NEXT
After a year where survival and
resilience drove decision-making,
it may be tempting to regard lease
accounting and changes to the audit
as lower-level priorities. However,
both should be critical factors in longterm
planning and in establishing new
processes for better business insight.
While new standard implementation
and audit process updates can be
complex and time-consuming, they
can also bring greater visibility into
leases, value, financial health and
even unlock hidden liquidity-which
has never been more critical. ■
Sarah O'Sullivan is an Accounting
Director at LeaseQuery, a purpose-built,
CPA-approved lease accounting software
solution for the most comprehensive
regulatory reform in 40 years. For
more information, visit LeaseQuery.com.
http://www.LeaseQuery.com http://www.CPAPracticeAdvisor.com
august2021

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