According to a survey from LeaseQuery, companies struggled with the first audits completed under the landmark new lease accounting standard. In fact, half of public companies that have completed their first post-transition audit under the new lease rules report additional effort was needed for the process. However, the process is yielding benefits for companies in terms of providing greater transparency for lease modification and uncovering critical cash flow during the COVID-19 crisis.

The survey of 240 accountants from LeaseQuery was conducted in partnership with Encoursa. The survey provides insights into the obstacles faced before, during and after audits. The survey provides lessons learned for public companies and advice for private companies and nonprofits transitioning to the new accounting standards ASC 842 and IFRS 16.

“Although the extension for lease accounting compliance by the FASB and GASB was welcome news for private and governmental organizations in the wake of the pandemic, deadlines are still on the horizon,” Jennifer Booth, VP of accounting at LeaseQuery, said. “The challenge of a post-transition audit is looming for many private companies and has been vastly underestimated. This massive undertaking coupled with financial pressures due to COVID-19 have created a crucial need for better capital management, including transparency into leases to maximize cash flow and liquidity.”

Key survey findings also include:

• While the post-transition audit process was a challenge, accountants identified more cash flow opportunities and enhanced data transparency. More than half of public companies (58%) discovered embedded leases during their post-transition audit preparation and 26% updated their internal controls for lease terminations and modifications. Better visibility into business data and a holistic view of leases can provide substantial advantages for businesses looking to renegotiate terms during the pandemic.
• Auditors can play a critical role in transitioning to the new standard effectively, but companies should do more to open up communication and collaboration. While two-thirds of respondents said their auditors have full access to the organizationsí lease accounting solution, 44% said their auditor had no involvement in the transition process. Just 20% of organizations had auditors who set up planning meetings prior to the first audit and only 18% of companies reported having auditors who guided them through the lease accounting transition.
• Private companies and nonprofits should follow the advice of 53% of companies who chose a software solution backed by a SOC report, which can reduce the required testing performed by the company and auditors to complete their audit.
• While the survey found 50% of respondents leveraged lease software to prepare for and complete the audit, 38% used Excel or another spreadsheet program. Those who originally thought Excel would work for minimal lease changes are now facing difficulties accurately accounting for numerous leases being renegotiated due to COVID-19. This highlights the need for a more sophisticated lease accounting and compliance tool that can provide real-time insights for better decision making.