SEC Comment Letters Reveal Lease Accounting Challenges

A new report from compliance management and analytics provider Intelligize reviews Securities and Exchange Commission (SEC) comment letters and replies related to the Financial Accounting Standards Board’s (FASB’s) ASC 842 lease accounting standard, and it confirms that FASB and the SEC have shown considerable patience in enforcing the new rule, which requires the tracking and disclosure of all of a company’s leased assets, both finance and operational.

FEI Daily spoke with Intelligize senior director Robert Peters about the biggest surprises from the report and what senior-level financial executives can learn from the SEC's enforcement.

FEI Daily: What are the biggest surprises from the report? What might a financial executive (CFO, corporate controller, etc.) be surprised to learn?

Robert Peters: The biggest story here is that issuers have done a remarkable job adopting the new lease accounting standard (ASC 842). During the adoption of the new revenue recognition standards (ASC 606), it was the topic du jour in SEC comment letters. We haven’t seen the same universal uphill battle with ASC 842.

FEI Daily: What were the biggest lease accounting ‘headaches’ across industries?

Peters: We saw a laser focus on day-one accounting issues: lease identification, initial measurement of the right of use asset, and adequate adoption disclosure. Presumably, the SEC’s focus will shift to accounting for lease concessions made during the pandemic as we proceed through the 2020 and 2021 reporting schedule.

FEI Daily: Why did smaller issuers draw the most scrutiny from SEC staff examiners?

Peters: Smaller issuers are dealing with the one-two punch of the adoption of new revenue recognition (ASC 606) and lease accounting (ASC 842) standards. Issuers with tighter resources typically bear the brunt of regulatory and accounting compliance shifts (with minimal external assistance). If you’re already the CFO, CAO and controller, keeping the project manager plate for an ASC 842 transition spinning as well is quite a feat. 

FEI Daily: What are the COVID-related hurdles for lease accounting?

Peters: It’s a cruel irony that issuers with a physical footprint are dealing with both the adoption of these new standards and pandemic-driven lease modifications, terminations, and abandonments. While FASB issued an enormously helpful Staff Q&A in April 2020, we are still seeing issuers struggle to account for these changes. For example, issuers are working through whether the events above could trigger an impairment at the broader asset group level. If not, they’re trying to figure out how to account for operating leases that were just added to the balance sheet.

FEI Daily: If you could tell our readers one thing about the SEC and lease accounting?

Peters: The SEC notices and comments when issuers use non-GAAP accounting measures to exclude the effects or impact of new accounting standards. If you believe that you have a compelling argument for such a metric, give the SEC a call before running afoul of the comment letter process.