The Basics of ASC 842, Leases

Scrubbed

Scrubbed

The Basics of ASC 842, Leases
The growing concern around the previous lease guidance, Accounting Standards Codification (“ASC”) 840, has finally been addressed as the Financial Accounting Standards Board released its long-awaited leasing standard, ASC 842, Leases, in February 2016. The main criticism of the previous lease guidance is that it did not always provide a faithful representation of leasing transactions. The main objective of ASC 842 is to increase transparency and comparability among organizations by recognizing a right-of-use (“ROU”) asset and a lease liability on the balance sheet and disclosing key information about leasing arrangements. This gives the users a comprehensive and understandable picture of the company’s leasing activities. The guidance is also one of several joint projects with the International Accounting Standards Board aimed at converging the US Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards.

What’s new?

Definition of a lease. A lease is a contract that conveys the right to control the use of an identified asset to a lessee for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset.

Whether a contract is or contains a lease is critical under ASC 842 because lessees are required to recognize ROU assets and liabilities for essentially all leases. Under ASC 840, the critical determination was only whether a lease was a capital lease or an operating lease because only capital leases are recognized in the statement of financial position.

Lease classification. Lease classification is now determined at the commencement date instead of the lease inception date. ASC 842 provided for the application of dual lease model – operating lease and finance lease (either direct financing or sales-type lease for lessor). Under ASC 842, a lessee shall classify a lease as a finance lease, and a lessor shall classify a lease as a sales-type lease when the lease meets any of the following requirements:
  • The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
  • The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
  • The lease term is for the major part of the remaining economic life of the underlying asset. However, suppose the commencement date falls at or near the end of the underlying asset’s economic life. In that case, this criterion shall not be used for purposes of classifying the lease.
  • The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
  • The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.
The four criteria to determine the lease classification generally remain from ASC 840, with the addition of the 5th requirement above. Notice that the bright lines related to the concept of “the major part of the remaining economic life of the underlying asset” and “lease payments representing substantially all of the fair value of the underlying asset” are now removed under ASC 842, which will entail a higher level of judgment from the management. Despite the removal of the bright lines, ASC 842 acknowledges that one reasonable approach in determining whether the lease term is for the major part of the asset’s remaining economic life and whether the lease payments represent substantially all of the asset’s fair value are the 75% and 90% thresholds, respectively, cited in ASC 840.

Initial direct costs. Initial direct costs are broader in scope under the old standard. In ASC 842, initial direct costs only include incremental costs that would not have been incurred if the lease had not been obtained. Costs incurred such as legal fees, cost of negotiating the lease terms, and allocated costs that are capitalizable under ASC 840 will now be expensed under the new standard.

Components. Under ASC 840, executory costs such as insurance, taxes and maintenance are included in minimum lease payments and, consequently, in the lease calculations. In lieu of executory costs, ASC 842 introduced new concepts – lease components, non-lease components, and non-components. Generally, lease consideration is allocated between the lease and non-lease components on a relative standalone price basis. While non-lease components (e.g., common area maintenance) transfer goods and services to the lessees, they do not relate to securing the use of the leased asset. Consideration attributable to non-lease components is not a lease payment and, therefore, is not included in the measurement of ROU asset or lease liability. Companies should account for non-lease components according to other applicable standards unless the company elects the accounting policy to not separate lease and non-lease components. This accounting policy is further discussed in this article.
Activities that do not transfer a good or service to the lessee or amounts paid solely to reimburse costs of the lessor are called non-components and are not allocated any of the considerations in the contract and are usually expensed as incurred. Under ASC 842, executory costs are considered non-components of a lease contract; hence will not qualify for capitalization and are immediately expensed as incurred.

Discount rate. Both lessors and lessees should use the rate implicit in the lease when discounting lease payments. However, if the rate implicit in the lease cannot be reliably determined, lessees should use its incremental borrowing rate (“IBR”). In most cases, lessees use its IBR in its calculation. The disparity arises as IBR is defined differently in both standards. ASC 840, it defines IBR as “the rate that, at lease inception, the lessee would have incurred to borrow over a similar term the funds necessary to purchase the leased asset.”

On the other hand, ASC 842 defines it as “the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.” This means that the determination of IBR warrants additional effort as companies would typically need to have a specific quotation from a bank or other financial institutions instead of using the treasury discount rates. Practical expedient related to discount rate is discussed further in this article.

Lessee accounting. Perhaps the biggest change we should expect is the recognition of the ROU asset representing the company’s right to use the underlying asset for the lease term and lease liability for essentially all leases. It can be recalled that under the previous lease standard, ROU asset and lease liability was not required to be recognized for operating leases, but rather lease payments are expensed on a straight-line basis over the lease term. Practical expedient on short-term leases is discussed further in this article.

Initial measurement

Under both operating and finance leases, lease liability is measured, at the commencement date, at the present value of future lease payments, discounted using the discount rate for the lease. Meanwhile, the right-of-use asset is calculated as the sum of lease liability, lease payments made to the lessor at or before the commencement date, and initial direct cost less any lease incentives received.

Subsequent measurement – Lease liability

After the commencement date, the carrying amount of finance lease liability is increased through accretion of interest expense using the discount rate used at the commencement date and reduced by lease payments made. On the other hand, operating lease liability is measured at the present value of the lease payments not yet paid discounted using the discount rate for the lease established at the commencement date.
Even though the subsequent measurement is worded differently, it will still yield the same lease liability balance for the period.

Subsequent measurement – ROU asset

After the commencement date, finance lease ROU asset is measured at cost less any accumulated amortization and any accumulated impairment losses; whereas operating lease ROU asset is measured at the amount of remeasured lease liability, adjusted for prepaid or accrued lease payments, the remaining balance of any lease incentives received, unamortized initial direct costs and any impairment of the ROU asset.

Income statement effect

The lease-related expense of a finance lease is similar to a capital lease in ASC 840. Interest expense is calculated using the effective interest method. ROU asset is amortized on a straight-line basis, unless another systematic basis is applicable, over the useful life of the underlying asset or lease term, whichever is shorter. Interest expense and amortization expense cannot be combined in the same line item and should be presented in a manner consistent with how companies present other interest expense and depreciation and amortization of similar assets, respectively.

For an operating lease, companies will recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. This straight-line lease expense is done by dividing the total lease payments over the lease term. Amortization of ROU asset is calculated as the difference between the straight-line lease expense and interest expense on the lease liability. Bear in mind that we only compute amortization and interest expense for subsequent measurement of ROU asset and a lease liability, respectively. The straight-line lease expense calculated above is the one recorded in the books.

Lessor accounting. The fundamentals of lessor accounting under the old standard remain practically the same. Most of the improvements relate to the alignment of the lease standard with ASC 606, Revenue from Contracts with Customers.

Same with the old standard, lessors are required to classify a lease as operating, sales-type or direct financing. The fourth classification, leveraged lease, is eliminated prospectively in ASC 842. Lessors use the same criteria as the finance lease classification for lessees. If at least one of the criteria is met, lessors classify the lease as a sales-type lease. If none is met, the lease is classified as an operating lease unless the lessor obtains a residual value guarantee from an unrelated third party other than the lessee and the guarantee is sufficient to satisfy the “substantially all” criterion (as discussed in the lessee accounting section), in which it should be classified as a direct financing lease.

In a sales-type lease, selling profit or loss is recognized depending on the collectability of the lease payments and residual guarantee provided by the lessee, unlike in the old standard where there is a requirement to recognize selling profit or loss. Another improvement in the new standard is that selling profit or loss could now be recognized for direct financing lease. Selling loss is recognized at lease commencement while selling profit is deferred.

Lease of land and building. A contract typically includes lease of both land and building. Under ASC 842, the land is required to be classified and accounted for as a separate lease component unless the accounting effect of not separately accounting it is insignificant. Under ASC 840, the land is separately classified for the purposes of applying the lease-term criterion when the fair value of the land is 25% or more of the combined fair value of the land and building.

Disclosures. ASC 842 requires significantly more extensive qualitative and quantitative requirements, including the nature of the lease, significant assumptions and judgments made and amounts recognized related to the leases, as opposed to a general disclosure of the leasing arrangement under the old standard.

Optional Relief

ASC 842 provides numerous practical expedients and available policy election options to lead the companies into an easier transition to the new standard and reduce the cost and complexity of applying the new standard. The following are the practical expedients allowed:

  • Package of practical expedients – Allows lessees not to reassess (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any expired or existing leases. This expedient is available for transition only. Companies must apply all of the expedients in the package to all leases.
  • Hindsight practical expedient – Permits lessees to use hindsight in determining the lease term (i.e., when considering lessee options to extend or terminate the lease and to purchase the underlying asset) and in assessing the impairment of ROU asset. This expedient is available during transition only and must be applied to all leases. On the other hand, accounting policy election options available are as follows:
  • Short-term lease – Permits lessees not to apply the recognition and measurement requirements of ASC 842 for leases with a term of 12 months or less. Note that the 12 months threshold counts from the lease commencement date and not the effective date of the new standard.
  • Risk-free-rate – Permits private company lessees to use a risk-free rate as the discount rate for the lease, determined using a period comparable with that of the lease term. Public companies are not permitted to use the risk-free rate.
  • Lessee policy election to not separate lease and non-lease components – Lessees may elect not to separate lease from non-lease components and instead account both components together as a single lease component. This means that all of the consideration is allocated to the single lease component.
  • Lessor policy election to not separate lease and non-lease components – This allows the lessors to not separate lease from non-lease component if and only if (a) the timing and pattern of transfer of the lease and non-lease component are the same and (b) the lease would be classified as an operating lease if accounted for separately. If the lease component is the predominant component, the combined component (lease and non-lease component) is accounted as an operating lease under ASC 842; otherwise, it is accounted for under ASC 606. Other considerations on transition include the following:
  • Portfolio approach – Companies are permitted to apply the lease guidance at a portfolio level if the company expects that it would not differ materially if the lease guidance is applied on a lease-by-lease or contract-by-contract basis. Companies are not required to quantify the difference, but only a reasonable approach should be taken in determining the appropriate portfolio for its leases.
  • Capitalization threshold – Consistent with the practice in other areas of GAAP (e.g., capitalizing property, plant and equipment), companies may adopt reasonable capitalization thresholds below which ROU asset and lease liability is not recognized.
Effective Date
ASC 842 should be adopted by private companies for annual fiscal reporting periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Meanwhile, the standard is already effective for public companies and public not-for-profit companies starting the fiscal years beginning after December 15, 2018 and December 15, 2019, respectively.

Transition Approach

Upon adoption of ASC 842, companies are prohibited from using the full retrospective approach and are only required to apply a modified retrospective approach. Under the modified retrospective approach, companies will need to apply the requirements of ASC 842 to leases that existed before its effective date. There are two options to choose from when considering when to apply the transition accounting and consequently record the transition adjustments:

  • Apply the standard at the beginning of the earliest comparative period presented. Under this option, prior comparative periods are adjusted.
  • Apply the standard at the effective date of the standard. Prior comparative periods would not be adjusted under this option. What’s next?


Private companies should consider the following courses of action in complying with the requirements of ASC 842:

  • Inventory the lease contracts and understand the size and complexity of the lease portfolio
  • Update chart of accounts for new account titles such as right-of-use asset, lease liability, and other lease-related expenses
  • Collect data by reviewing the key terms of existing lease contracts (e.g., lease payment, lease term, escalation rate, extension or termination options)
  • Make a timely decision on the practical expedients and policy elections available
  • Be wary of new contracts that may contain lease
  • Consider the cost-effectiveness of utilizing a lease accounting software
  • Obtain assistance as necessary from technical accounting consultants or other field experts We’d love to help.

To ensure that all factors are considered in the pursuit of reliable financial reporting, effective and efficient operations, and compliance with law and regulations, our services can be scaled to accommodate your business needs. Our Technical accounting Group provides a thorough analysis on assessing the impact of complex and unusual accounting transactions, while also supporting your organization’s efforts in risk and SOX compliance and corporate finance advisory.

E-mail us at [email protected] for a full consultancy assessment.

Disclaimer
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. It is not intended to be relied upon as accounting, tax, or other professional services. Please refer to your advisors for specific advice. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

*Disclaimer: Services being offered do not require a state license.
About the Author
Sherwin G. LongasaSherwin is a Supervisor of the Technical Accounting Group of Scrubbed. He assists companies in preparing technical memoranda and performs an extensive review of US GAAP financial statements (i.e., 10-Q and 10-K SEC reports), note disclosures, and account reconciliations. Prior to joining Scrubbed, he has more than three years of professional experience with Reyes Tacandong & Co., handling financial statement audits for public and private companies.

How Scrubbed Can Help

Contact Scrubbed to ensure your business applies the revenue recognition standard correctly with expert support

CONTACT US
How Scrubbed Can Help

Related Content

Blogs

September 15 Estimated Tax Deadline: Strategies for Pass-Through Entities

September 15 Estimated Tax Deadline: Strategies for Pass-Through Entities

For growing pass-through entities, the September 15 tax deadline often creates a collision between cash flow and internal capacity. Guessing at estimated payments leaves companies vulnerable to IRS penalties or unnecessarily traps critical working capital meant for Q4 growth. By establishing a Safe Harbor floor and utilizing the Annualized Income Installment Method, companies can align tax outlays directly with actual revenue. When this execution is handled proactively, finance leaders stop playing defense against deadlines and reclaim their time for strategic planning. When a high-growth pass-through entity, such as an S-Corp or a Partnership, comes off an unexpectedly strong summer, revenue is up. This should be a moment for leadership to celebrate and plan their Q4 investments. Instead, the internal finance team often finds themselves staring down a cash crunch they didn't anticipate. The pressure point is September 15. For growing operations, this date is often a collision course. It is not only the deadline for Q3 estimated tax payments, but it is also the extended filing deadline for Forms 1065 and 1120-S . When you have an internal team trying to finalize the previous year's historical data while simultaneously projecting the current year's performance, the structure usually begins to strain. This isn't about a team dropping the ball. It's simply what happens when internal workflows haven't scaled up to match a company's growth. When two major deadlines collide, and the volume is too high, a stretched team has no choice but to improvise. The Cost of "Guesstimating" In a pass-through entity, the business itself generally does not pay federal income tax. Because income from partnerships and S corporations generally passes through to their owners, owners may need to make individual estimated tax payments based in part on their share of the entity’s taxable income When internal teams don't have a dedicated workflow for this, they often get bogged down trying to predict exact year-end profits during a busy quarter. Without a clear mechanism to manage this, I frequently see companies do one of two things: they either underpay and leave themselves vulnerable to IRS penalties, or they overpay to "be safe." Overpaying might feel like the responsible choice in the moment, but it unnecessarily ties up working capital. When these distributions are sized off gross revenue rather than a projection that accounts for deductions or state-level elections, the company pulls more cash out of the operating account than the owners actually owe. That excess traps liquidity that could have been used to fund critical Q4 growth initiatives—like a marketing push or inventory expansion—without seeking outside financing. Establishing an Estimated-Tax Safe Harbor  When our tax professionals step in to manage this process, the very first thing we do is establish a predictable foundation. We immediately build a "Tax Compliance Calendar" integrated with a "Safe Harbor Floor." A useful starting point is determining which estimated-tax safe harbor applies. For many taxpayers, one option is to base required annual payments on 100% of the prior year's tax, increasing to 110% for certain higher-income taxpayers. The current-year 90% test may also apply. Meeting the applicable requirements through timely payments can generally reduce exposure to estimated-tax underpayment penalties. Once that floor is established, we can adjust for the reality of the current year. Aligning Outlays with Actual Cash Flow If a company sees a massive spike in revenue during Q3, the standard installment method might demand a payment that creates a sudden cash flow imbalance. Good intentions won't balance the cash flow at this stage; you need a precise mathematical approach. To stabilize cash flow during a sudden revenue surge, one strategy to consider is the Annualized Income Installment Method . Instead of assuming income is earned evenly throughout the year, the Annualized Income Installment Method determines the owner's required installments based more closely on income earned during the applicable annualization periods State-level PTE tax elections may also provide federal tax benefits by allowing qualifying state income taxes to be paid and deducted at the entity level rather than being subject to the individual SALT deduction limitation. The result? Depending on the state's PTE tax regime, entity-level payments may reduce the state estimated-tax payments otherwise required from individual owners. A deductible PTE tax payment may also reduce the taxable income passed through to owners for federal purposes, which can affect their projected federal estimated-tax liability. Restoring Strategic Headspace When tax planning is handled consistently throughout the year, it changes how a leadership team operates. It can significantly reduce the risk of an "April Surprise." When Q3 estimates are calculated accurately and tied to a deliberate strategy, leadership knows exactly how much capital is truly theirs to spend. Tax shifts from a looming, unpredictable liability into a manageable line item. Just as importantly, the internal finance leader gets their time back. Instead of spending the first two weeks of September finalizing and issuing K-1s, calculating thresholds, and worrying about penalties, they can focus on high-level financial modeling and operational efficiency. A strong tax partner doesn't just run the numbers; they take the friction out of the process so your team can focus forward. When an experienced team handles the heavy lifting behind the scenes, you stop playing defense against IRS deadlines and start using tax strategy as a genuine tool to fund your growth. See how our tax professionals support growing operations and keep execution predictable. Let's talk through how we can support your finance function. Comparing Q3 Tax Strategies: Safe Harbor vs. Annualized Method vs. PTE Strategy Ideal for Primary Benefit Risk Level  100%/110% Safe Harbor  Rapidly growing companies  Provides protection from estimated-tax underpayment penalties when applicable safe-harbor requirements are satisfied  Low (May temporarily tie up cash if revenue drops)  Annualized Method  Seasonal or late-year spiking revenue Align tax outlays directly with timing of taxable income  Moderate (Requires meticulous record-keeping) PTE Tax Election Entities in high-tax states May provide an entity-level federal deduction for qualifying state income taxes while providing state tax benefits to eligible owners Low (Requires state-specific eligibility and election compliance) Key Takeaways: The Deadline Collision: The simultaneous timing of Q3 estimates and extended historical filings places severe strain on internal finance teams when workflows haven't scaled. The Cost of "Guesstimating": Overpaying estimated taxes based on gross revenue ties up liquidity that could otherwise fund critical Q4 growth initiatives without requiring outside financing. Building a Safe Harbor Floor: Establishing a baseline payment based on 100% or 110% of the prior year's tax liability can provide protection from estimated-tax underpayment penalties when the applicable safe-harbor requirements are satisfied. Aligning Cash Flow: The Annualized Income Installment Method stabilizes cash positions by calculating tax based on income earned during the applicable annualization periods rather than an arbitrary quarterly fraction. Restoring Strategic Headspace: When tax planning is handled reliably behind the scenes, internal finance leaders get their time back to focus on high-level financial modeling instead of chasing K-1s.

Read More >
Blogs

How to Scale a Fractional CFO Practice: Infrastructure, AI, and Execution

How to Scale a Fractional CFO Practice: Infrastructure, AI, and Execution

Fractional CFOs scale by separating strategy from daily execution. At the CFO Leadership Conference in Boston, panelists outlined the model: a three-part team structure, AI tools for repetitive analysis, and strict scope boundaries. The common thread is that strategic capacity depends on reliable accounting operations underneath it. Fractional CFOs operate in a fundamentally different model, balancing multiple clients and shifting priorities without the benefit of deep organizational embedding. You are hired to provide altitude, clarity, and rapid impact. But when a client lacks a mature finance operation, that executive focus is quickly consumed by operational cleanup. This exact tension took center stage at the CFO Leadership Conference in Boston. During our morning panel discussion, The Multi-Business Executive: How Fractional CFOs Scale Leadership Across Clients , moderated by Scrubbed’s Accounting Director Arian David, Triangle Coffee founder and fractional CFO Ottavio Siani and Scrubbed’s CFO Aira Pineda detailed how fractional CFOs build capacity to avoid this operational trap. They mapped out the real-world infrastructure and AI practices required to support multiple fast-moving client environments. Here are the operational realities shared in the room. The Infrastructure Blueprint for Scaling a Fractional CFO Practice A primary challenge for scaling organizations is the gap between strategic desires and foundational accuracy. Volume increases faster than structure, and founders frequently bottleneck their own operations by micromanaging the finance function. As Aira shared with the room, stepping into a fractional role often means untangling founder-led accounting and directly telling the CEO, "you're not supposed to do this". Once leaders step back from the daily execution, "suddenly they have time" to actually focus on growing their business. Successful practitioners build a deliberate team architecture to handle the volume. To build a sustainable infrastructure, Ottavio explained that a fractional CFO setup requires three key elements: A fractional CFO to provide strategic direction. A trusted internal employee to manage sensitive operational context. An external accounting firm to run the daily numbers. This structure prevents the CFO from becoming the operational bottleneck. Read: Are Fractional CFOs the Future for Growing Companies? Navigating Risk in Founder-Led Environments The most pointed friction in a fractional role often comes from enforcing structure. During the session, an audience member challenged the panel on how to balance strict risk controls with the commercial reality of working for independent founders who operate as the "gods of their own businesses". Aira addressed this tension directly, clarifying that operational controls and commercial growth do not have to collide.  "I don't think it's contradictory, to be honest. I think it's complementary," she explained.   "I think you make better decisions as a CFO, having kind of just at the back of your mind that risk mindset." Taking calculated risks is necessary to create shareholder value. However, a fractional CFO can only support that aggressive growth when the foundational accounting operations are secure enough to absorb the complexity. Building Fractional CFO Capacity with AI Tools Technology accelerates this architecture when carefully managed. Ottavio shared how he uses Claude to generate monthly financial statement analyses based on tested templates, reducing a repetitive task to minutes. Arian detailed using Claude to abstract private equity contracts, while Aira highlighted using NotebookLM to summarize 50-page forensic documents. However, systems create results, but human professionals must validate them. Aira illustrated the danger of false confidence by testing a complex revenue recognition issue across Claude, Gemini, and ChatGPT. Although all three models provided the exact same answer, they failed the final human review when  "A big CPA firm comes and says, no, that's not the accounting treatment." Designing Aligned Execution and Preventing Scope Creep Growth adds complexity. Strong execution ensures that complexity remains manageable. When fractional leaders possess a reliable accounting layer, closes become predictable and strategic conversations gain traction. Without this layer, scope creep inevitably takes over. "I think a challenge with being a fractional CFO is having to limit your scope, right?" Ottavio noted. "I typically dedicate like a day a week, and I need to keep myself from spending too much time outside of the original scope that we, we agreed upon, so that I can make sure that I'm kind of meeting all my clients". Key Takeaways: A sustainable fractional CFO practice separates strategy from execution: the CFO, a trusted internal employee, and an external accounting team each hold a distinct role. Founders bottleneck their own operations by staying in the daily accounting. Helping them step back frees time for growth. Risk mindset and commercial growth are complementary. Calculated risks require stable accounting operations underneath them. AI tools like Claude and NotebookLM compress repetitive analysis from weeks to minutes, but experienced professionals must verify every output against source documents. Scope discipline holds only when a reliable accounting layer runs the day-to-day work. About the Panelists Arian David | Accounting Director, Scrubbed  Arian serves as the Accounting Director for Retail and Distribution at Scrubbed. She brings over 12 years of specialized execution experience managing complex accounting operations across the distribution, e-commerce, and retail sectors.  Aira Pineda | CFO, Scrubbed  Aira directs financial strategy and operations as the Chief Financial Officer at Scrubbed. She brings over a decade of hands-on experience operating as a fractional CFO for small to medium-sized enterprises. Ottavio Siani | Fractional CFO & Founder, Triangle Coffee  Ottavio is the founder of Triangle Coffee, a multi-location café business operating in Boston and Washington, D.C. As an active fractional CFO, he advises a portfolio of clients, including Hon, CN Naturals, and Port of Mocha, on building and restructuring finance teams. 

Read More >
Blogs

Scaling Your Finance Function: When to Hire a Fractional Finance Team

Scaling Your Finance Function: When to Hire a Fractional Finance Team

As noted at the CFO Leadership Conference, volume often outpaces structure, quietly straining finance execution. To scale capacity, growing companies can integrate partner-led finance teams anchored by an internal liaison. By taking responsibility for this daily execution, these professionals restore predictable reporting and give leaders their focus back. For many middle-market companies, there is a distinct moment when the finance function shifts from supporting the business to struggling to keep up. Transaction volume increases. Deadlines tighten. The close starts taking longer, and reviews feel rushed. Internal teams spend more time fixing issues than moving forward. During our afternoon panel at the CFO Leadership Conference in Boston, How CFOs Use Fractional Talent to Scale the Finance Function, Triangle Coffee founder and Fractional CFO Ottavio Siani, Scrubbed’s CFO Aira Pineda, and Accounting Director Arian David unpacked a critical reality for growing organizations. Building a finance organization that can flex with the business requires deliberate structural choices. Here is a closer look at how to architect that structure by integrating partner-led finance teams. When to Hire: The 160-Hour Threshold Prompted by Arian to define the trigger point for bringing on fractional help, Scrubbed CFO Aira Pineda highlighted a practical threshold: evaluating whether a role truly demands a full-time, 160-hour-per-month commitment.  This evaluation is a cornerstone strategy for companies navigating new growth stages. Fast-moving projects often require immediate, specialized execution.  " Sometimes I need a project very quickly done, and I need someone experienced already ," Aira explained. " I don't want to go through the headache [of hiring full-time]. A fractional team just makes it faster for me. " Partner-led finance teams offer a cost-effective alternative to full-time hiring, providing the exact capacity needed without the overhead of onboarding. They take responsibility for the work behind your numbers, allowing the internal team to focus on strategic growth. Full-Time vs. Fractional Finance Team Comparison Feature Full-Time Finance Hire Fractional Finance Team Capacity Commitment Onboarding & Ramp Time Billing Model Specialization 160+ hours/month (Fixed) 60–90 days Annual Salary + Benefits + Equity Generalist execution Flexible / Scalable capacity Immediate deployment Flat Monthly Retainer Multi-disciplinary experts  Best Used For  Continuous daily operations  Fast growth, specialized projects, scaling The Architecture of Integration: The "Bridge" Person A fractional finance team cannot work effectively in isolation. Fractional CFO Ottavio Siani, who systematically leverages these exact structures across multiple ventures to scale his own executive leadership,  identified a critical requirement for successful integration: designating an internal "bridge" person. This full-time employee acts as the primary point of contact between the company and the fractional team. They do not need deep accounting expertise. Their value lies in providing internal context and answering day-to-day questions while the company operates.  When communication paths and responsibilities are clearly defined, fractional professionals can operate as an extension of the internal finance function rather than as a disconnected outside vendor. Best Practices for Integrating a Fractional Finance Team A fractional finance function only succeeds when it is treated as an integrated part of the business. The Standard of Accuracy : Accuracy is a non-negotiable requirement. As Aira noted during the panel discussion, "We work with numbers, and accuracy matters. If we end up, as a CFO, presenting a wrong number to our board... that is grounds for termination." Match the Billing Model to the Engagement : While hourly billing is common for initial testing, Ottavio strongly advocated for flat-fee models to maintain strategic alignment. "The problem with hourly billing is the company ends up being pretty precious with your time, and you'll often be held out of important meetings," Ottavio noted. "Retainer-based [billing] leads to a much healthier relationship." Demand Verified Data Controls (SOC 2) : Handing over financial workflows requires absolute trust. Middle market businesses must partner with CPA firms that maintain rigorous, verified controls, such as a SOC 2 audit, to guarantee data security. Scaling with Technology and Distributed Talent A fractional model also allows companies to broaden the talent pool available to the finance function. Distributed teams can provide access to specialized skills, additional coverage, and capacity that adjusts as the business changes. However, location alone does not determine whether the model will work. Quality depends on how the team is managed, how communication is structured, how the work is reviewed, and whether the provider understands the company’s accounting requirements and operating environment. Technology can further expand the team’s capacity. During the panel, Aira described analytics teams using AI-assisted tools to write Python code and process data more efficiently than manual Excel workflows would allow.  The value is not simply that the technology moves faster. It reduces repetitive work, so finance professionals can spend more time reviewing outputs, investigating exceptions, and applying judgment. Technology can accelerate the work. Accountability remains human. Building the Right Finance Structure Fractional support works best when it solves a defined structural need.  The company must still establish internal ownership. Responsibilities must be clear. Workflows must be documented. Review standards must be understood by both teams.  When those elements are in place, a fractional finance team can help the business: Add capacity without immediately adding permanent headcount. Access specialized expertise. Support periods of rapid growth or transition. Make the close and reporting process more predictable. Reduce pressure on internal finance leaders. Create a stronger foundation for future hiring. The objective is not to outsource responsibility. It is to build a finance function with the right capacity, expertise, and structure for the company’s current stage of growth. About the Panelists Arian David | Accounting Director, Scrubbed  Arian serves as the Accounting Director for Retail and Distribution at Scrubbed. She brings over 12 years of specialized execution experience managing complex accounting operations across the distribution, e-commerce, and retail sectors.  Aira Pineda | CFO, Scrubbed  Aira directs financial strategy and operations as the Chief Financial Officer at Scrubbed. She brings over a decade of hands-on experience operating as a fractional CFO for small to medium-sized enterprises. Ottavio Siani | Fractional CFO & Founder, Triangle Coffee  Ottavio is the founder of Triangle Coffee, a multi-location café business operating in Boston and Washington, D.C. As an active fractional CFO, he advises a portfolio of clients, including Hon, CN Naturals, and Port of Mocha, on building and restructuring finance teams. 

Read More >

Links

Contact Information

SF Bay Area Headquarters
111 Anza Boulevard, Suite 320, Burlingame, CA 94010, United States

Phone: (800)837-5160
Email: [email protected]

"Scrubbed" is the brand name under which Scrubbed Advisory, LLC and Scrubbed Assurance, LLP provide professional services. Scrubbed Advisory, LLC and Scrubbed Assurance, LLP practice in an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations, and professional standards. Scrubbed Assurance, LLP is a licensed independent CPA firm that provides attest services to its clients, and Scrubbed Advisory, LLC provides tax, finance, and support services to its clients. Scrubbed Advisory, LLC is not a licensed CPA firm.

Copyright © Scrubbed. All rights reserved.