When is the Deadline?
Public companies were required to adopt January 2019, including both GAAP & IFRS. Private companies were required to adopt in January 2020. However, the standard for private companies got delayed** twice until January 2022.
**Interestingly, the FASB Chair Russ Golden said he was “disappointed” that many software companies weren’t ready for the lease accounting rules. Technology Could Slow Pace of New Accounting Rules (WSJ, June 2019)
What is the Impact on the Accounting Industry?
A regulatory shift like this can have a significant impact. Every audited company has at least 1 lease. Therefore, there is an incremental increase in their workload – for some, it will take a few additional man-hours, for others they will fund new full-time positions. For auditors, they need to add a new workflow to the annual audit.
At a macro level, the new Lease Accounting regulations will shift $3 trillion of capital onto the Balance Sheet, according to the Financial Times.
At a practical level, an estimated 50,000 companies have adopted – or plan to adopt – a software solution to help comply with the new Lease Accounting standards. This is known as “Lease Accounting Software”, which brings us one step closer to our understanding of the $1bn market.
Shouldn’t Companies Just Do This With Spreadsheets?
Perhaps . If they have less than 10 leases. Or a small portfolio of very simple leases. But once you get past 10 leases, the task of updating monthly journal entries and patching annual disclosures requires rule-based software. Keep in mind the standard goes beyond office leases and includes equipment – cars, forklifts, servers, telecom, medical devices, etc – and leases embedded within service contracts.
Any significant change in a lease – term, payments, options – requires a company to apply modification accounting, which adds a layer of complexity that a spreadsheet may not be able to handle.
For public companies, they may need to show more information in a SOX-regulated environment – such as User Controls and Audit Trail.
So, Companies Are Forced To Use Software?
Yes. Lease Software allows you to manually type in your lease data, answer a few questions about each contract, and *poof!* out comes your monthly journal entries and disclosures.
Is This Why Lease Software Is a $1bn Market?
Yes. Imagine you’re an N95 mask company on the verge of a Covid breakout. You’re going to be in demand.
Has There Been Investment Activity?
Here is the list of Corporate Development activity in the past couple of years:
|Year||Vendor||Investor||Investment Amount (Est.)|
|2018||Visual Lease||Growth Street||$5m+|
|2019||Visual Lease||Spectrum Equity||$20m+|