The number of Initial Public Offerings (IPOs) in 2021 rose by 64% over 2020, and proceeds from these IPOs were up by 67% on the preceding year.
Overall, there were 2,388 IPOs globally, with 528 of these being in the U.S. and raising a combined $174.6bn.
If your company is looking to IPO this year, or even in the near future, then this is a must-read.
Why lease accounting is a big deal
The world of lease accounting has changed dramatically over the past few years. Traditionally, lease accounting has been governed by Topic ASC 840, which was the FASB’s standard that dealt with leases.
Leases, particularly operating leases, were handled in a relatively straightforward manner. These leases were expensed through the income statement, and that was that.
This was fine, until a number of accounting scandals rocked the business world, including the infamous Enron, WorldCom and other debacles.
Among the issues highlighted in many of these scandals, was the role that leases played in so-called “off balance sheet” arrangements. Global accounting bodies, including the FASB and IFRS, tackled these issues head-on, and the result was new accounting standards, particularly ASC 842 and IFRS 16. These new standards brought more rigorous rules to accounting for leases, including the necessity of having a right-of-use asset and lease liability on the company’s balance sheet, as well as more comprehensive disclosures.
While public companies have had to implement this new lease accounting standard already, the deadline for private companies was postponed more than once.
Lease accounting and IPOs
What this means in practice, is that while public companies have known about the requirements to comply with ASC 842 for a while – for private companies, this has been less prominent on their radar.
Especially for companies planning an IPO, where numerous other pressures are being dealt with; from ensuring the right metrics are being hit, to communicating with stakeholders and rigorous filing requirements.
Ensuring that the company is fully compliant with an upcoming accounting standard might not be top of the list.
Once your company is public however, this will be one of the first issues that needs to be dealt with. And it’s always more difficult to deal with these issues when they are urgent.
Therefore, we recommend getting your lease accounting in order now. The good news is, with a little bit of planning it’s a lot easier than you may think.
Get your lease accounting in order
Where should you start? We recommend the following key steps:
1. Identify all leases
One of the major changes introduced by ASC 842 is the definition of a lease, and of course the treatment thereof. For example, any contract can contain a lease as defined by ASC 842, even if not explicitly called a “lease”.
The first task is to identify all leases, and we recommend collaborating with other departments to assist you in identifying all leases. Not only will this give you the best opportunity to ensure the completeness of your leases, but it can also result in other organizational synergies.
2. Get a headstart on key calculations
There are some specific calculations that need to be made when complying with ASC 842. Chief among these is the discount rate to be used when calculating the present value of future lease payments.
Note that this rate can be chosen by private companies to be the incremental borrowing rate (IBR) or risk-free rate, depending on what is calculable – while public companies cannot make this election.
3. Leverage technology
For any company looking at an IPO now or in future, the chances are that there are a number of leases on the books. From office space to equipment, vehicles, and the list goes on.
Manually making the calculations for these leases, on say an Excel spreadsheet, is extremely difficult, if not impossible. Excel has its place, however for these complex calculations a purpose-built lease accounting software solution is recommended.
Modern software solutions do almost all of the heavy lifting for you. Trullion, for example, lets you scan leases, picks up the important information from these leases using AI and Optical Character Recognition, and does everything for you from suggesting audit-ready journal entries, to ensuring up-to-date and complete disclosure.
With Trullion, you have access to tremendous benefits. These include:
- Seamlessly meet ASC 842 compliance requirements
- Accelerate your ASC 842 adoption timeline to be ready for your IPO
- Produce accurate and consolidated reports in minutes
- Effortlessly trace your audit trail back to the source data
- Access simple reports and clear financial schedules
- Most importantly, by adding Trullion, you will be able to save massive amounts of time, reduce stress and friction, save money, increase visibility, reduce errors and be fully compliant with ASC 842 requirements.
Ensure your IPO goes smoothly
For a smooth IPO (and beyond) ensure that lease accounting doesn’t trip you up. ASC 842 is still relatively new, and therefore there is a lot of focus around this key accounting area.
An automated lease accounting software solution is what you need to focus on a successful IPO, while letting technology handle what could otherwise be a massive resource drain.
To find out more about Trullion’s AI-powered automated lease accounting solution that’s being used by many of the world’s leading companies, get in touch today.