By Billy Fink | Shared post from the Hightower Blog
The long awaited new lease accounting standards are here. And despite years in the making, some companies are finding themselves behind the curve in putting processes and systems in place to adapt to the new regulations.
The Financial Accounting Standards Board (FASB) officially issued the new accounting standards in February. The changes are aimed at creating greater transparency as it relates to how companies record leases on their balance sheets. The proposed lease accounting changes will remove the distinction between finance leases and operating leases, and recognize operating leases as both an asset and a liability.
According to a new Deloitte survey poll, only 9.8% of financial and accounting professionals surveyed said their companies are prepared to comply with the new standards. “I think companies are starting to come out of the fog now and thinking about how they are going to implement the changes. But, I think the ones that are just starting now have a long road ahead of them,” says Katie Murphy, a partner in the Real Estate and Leasing group of law firm Goodwin.
Companies that have already started are ahead of the curve. Yet there are some legitimate reasons why firms have put FASB on the back burner. The process of circulating proposed drafts and fine tuning the proposed requirements has been dragging out for nearly a decade. Companies did not want to start too early before they had a firm idea of what the final standards would look like.
There has been more activity in putting new lease accounting processes and systems in place over the last year. Officially, public companies will have to start reporting in fiscal or calendar year 2019 and private companies in 2020. However, public companies that use Generally Accepted Accounting Principles (GAAP) accounting will have to report comparative figures starting two years prior, effectively 2017. Some firms are already looking at 2016 as a “dry run” to get up and running and work out any potential problems, says Murphy.
In a 2016 Lease Accounting Survey conducted jointly by PwC and CBRE, 70% of the firms surveyed said they plan to start implementing the new standard this year. However, only 10% had selected a software solution to accommodate the new standard.
Initially, the biggest stumbling block is gathering all of the data, because it requires a different level of analysis than the old rules, notes Murphy. Existing leases won’t be “grandfathered” in or accepted under the old rules. Companies will have to go back and look at all of their existing leases to make sure they have all of the needed information. “It is going to be a hard and painstaking process to get all of that data,” she says. As such, the new standards will also have a bigger impact on companies with a high number of leases, such as retail and restaurant chains that have hundreds of locations.
Deloitte’s survey found that retail/distribution firms were the least prepared with 61.2% of respondents expressing concerns over readiness. Other sectors that also rated high in that regard were automotive and telecoms at 59.3% and 56.9% respectively.
Another key difference is that companies have traditionally met reporting requirements by utilizing a hard lease abstract or by a spreadsheet. That is not going to work under the new standards, because there are assumptions that need to be made about lease trends that will require more than just plugging numbers into a spreadsheet. So, the two main steps for companies in preparing will be introducing new lease accounting software and also having increased coordination and communication between the accounting group and the business and legal people who negotiate and enter into the leases, notes Murphy.
“Under the new rules, if circumstances change, assumptions need to be reevaluated and the reporting adjusted,” she says. “So, it is more of an ongoing process than in the past, and it will require a lot more effort on behalf of companies to manage their portfolio.”